A trapped-factors model of innovation

Bloom, Nicholas, Romer, Paul M., Terry, Stephen J. and Van Reenen, John ORCID: 0000-0001-9153-2907 (2013) A trapped-factors model of innovation. American Economic Review, 103 (3). pp. 208-213. ISSN 0002-8282

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Abstract

We explain a counterintuitive empirical finding: Firms facing more import competition do more innovation. In our model, factors are trapped inside a firm. An increase in import competition encourages a firm to innovate by reducing the opportunity cost of inputs. Without trapped factors, trade liberalization leads to a small permanent increase in the worldwide rate of growth. With trapped factors, firms that face more import competition do relatively more innovation. The extra innovation induced by trapped factors induces a small permanent increase in aggregate output, consumption, and welfare, generalizing the appropriate estimate of the gains from trade.

Item Type:	Article
Official URL:	https://www.aeaweb.org/aer/papers.php
Additional Information:	© 2013 American Economic Association
Divisions:	Economics Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor
JEL classification:	D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm O - Economic Development, Technological Change, and Growth > O3 - Technological Change; Research and Development > O31 - Innovation and Invention: Processes and Incentives
Date Deposited:	02 Sep 2014 09:16
Last Modified:	11 Sep 2025 08:40
URI:	http://eprints.lse.ac.uk/id/eprint/59326

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