Innovation trade and the size of exporting firms

Letizia Montinari , Massimo Riccaboni (1) , Stefano Schiavo (2)

1 IMT Alti Studi Lucca
2 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

This paper contributes to the literature explaining firm-level heterogenenity in the extensive margin of trade, defined as the number of products exported by each firm. We develop a model where firms must invest in R&D to maintain and increase their portfolio of goods: the process of product innovation by new and incumbent firms is such that the probability to capture new products is a function of the number of varieties already exported. This mechanism, together with the entry/exit dynamics that characterize the economy, gives rise to a Pareto distribution for the number of products exported by each firm. On the other hand, we model export sales as depending on exogenous preference shocks on the demand side, which leads to a lognormal distribution for the intensive margin of trade. Both predictions are consistent with a number of empirical findings recently emerged in the literature; this paper provides additional evidence based on a large dataset of French firms. Finally, a simple extension to the model allows us to derive some interesting insights on the behavior of multi-products firms: sales of different products across destinations are not uncorrelated, but show a rather strict hierarchy.

Keywords: International trade; Extensive margin; Innovation; Preferential attachment; Multi-product firms

Domains: Economics and Finance

Letizia Montinari, Massimo Riccaboni, Stefano Schiavo. Innovation trade and the size of exporting firms. 2013. ⟨hal-03460771⟩