Innovation and Trade in the Presence of Credit Constraints
Series
CEPR Discussion Paper
Type
discussion paper
Date Issued
2015-02-01
Author(s)
Abstract
This paper examines how trade liberalization affects investments in R&D at the firm level. In a model where entrepreneurs are heterogeneous in their wealth endowment, they rely differently on external funds. In the presence of capital market imperfections, this implies heterogeneous access to external funds such that poor entrepreneurs run smaller firms, are less likely to invest in R&D, and more likely to exit the market. Decreasing trade costs resulting from tariff reductions exacerbate these characteristics. Using firm-level panel data on seven Latin American countries for 2006 and 2010, we find support for our theoretical predictions. While recent studies emphasize a positive impact of trade liberalization on firms' productivity-enhancing activities, we provide novel evidence showing that financial constraints can impair the effect on R&D efforts. To address potential endogeneity concerns, we verify our findings using external financial dependence based on U.S. firms. These results suggest that imperfect capital markets can prevent welfare gains from trade liberalization to materialize.
Language
English
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Number
10391
Pages
39
Subject(s)
Eprints ID
249854
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open.access
Name
CEPR-DP10391.pdf
Size
500.65 KB
Format
Adobe PDF
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