The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports

Abstract

We analyze how demand conditions faced by a firm impacts its innovation decisions. To disentangle the direction of causality between innovation and demand conditions, we construct a firm-level export demand shock which responds to aggregate conditions in a firm's export destinations but is exogenous to firm-level decisions. Using exhaustive data covering the French manufacturing sector, we show that French firms respond to exogenous growth shocks in their export destinations by patenting more; and that this response is entirely driven by the subset of initially more productive firms. The patent response arises 3 to 5 years after a demand shock, highlighting the time required to innovate. In contrast, the demand shock raises contemporaneous sales and employment for all firms, without any notable differences between high and low productivity firms. We show that this finding of a skewed innovation response to common demand shocks arises naturally from a model of endogenous innovation and competition with firm heterogeneity. The market size increase drives all firms to innovate more by increasing the innovation rents; yet by inducing more entry and thus more competition, it also discourages innovation by low productivity firms.

Foreign demand, developing country exports, and CO2 emissions: Firm-level evidence from India

“…Broadly, the strategy is to construct weighted average foreign import demand in countries that India tends to sell to, product by product, leaving India's own exports to the destinations out of the measure of import demand, and then instrumenting these measures with base-year weighted average shocks. We follow Mayer et al (2016) and Aghion et al (2019) in building our foreign demand shocks and in interpreting changes in these measures as shocks to the demand for exports from individual producers.…”

“…To separate the causal impact of foreign demand growth from unobservable determinants of production and emissions of individual Indian firms, we follow recent work in international trade that constructs firm-specific demand shocks from aggregate trade statistics (Hummels et al, 2014;Mayer et al, 2016;Aghion et al, 2019). In particular, we measure product-specific foreign import demand as the weighted sum of aggregate product-specific import demand in India's destination markets -excluding the contribution from India herself.…”

The superstar and the followers: Intra-firm product complementarity in international trade

“…The instrument needs to be core-destination specific, correlated with the trade value of the core and uncorrelated with other product trade flows. The instrument used in this paper relates most closely to the instrument used by Hummels, Jørgensen, Munch, and Xiang (2014) but also that in Aghion, Bergeaud, Lequien, and Melitz (2019) and Autor, Dorn, and Hanson (2013). The instrument is defined based on the product-specific import demand to a destination.…”

“…Variation does therefore not come from the firm specific weights as noted byBorusyak, Hull, and Jaravel (2018). See alsoAghion, Bergeaud, Lequien, and Melitz (2019).23 Similarly, when investigating the share of value, products not in the same HS6, HS4, or HS2 categories as any of the core products account for 59%, 23% and 12% of the export value.…”

Exploring the future of innovation diplomacy

“…The linkages between innovation and trade are receiving attention in the literature [34][35][36]. The OECD report focuses on the following three linkages:…”