Trade, competition and innovation

The impact of international trade on technological change and productivity is an important and well-researched topic. The existing literature focuses on spillovers of knowledge, market size effects, Schumpeterian effects, and escape competition effects. Separately, economists working in the areas of Economic Growth and Industrial Organization have looked for a relationship, often nonlinear, between market structure and innovation. This paper investigates the indirect role of trade on innovation through a contribution to domestic competition. Using a unit of analysis of HJT technology subclass, I construct a panel data set that spans the period from 2002 through 2012. Trade adjusted and unadjusted concentration ratios are constructed for HJT technology subclasses and used to deconstruct the contribution of trade to innovation through this indirect channel. This novel approach to the data also uncovers strong evidence of a nonlinear relationship between innovation and market concentration.