R&D Investments, Exporting, and the Evolution of Firm Productivity

A large empirical literature has documented that firm-level differences in productivity, size, ownership status, and other characteristics are crucial to understanding differences in firms’ decisions to export. The evidence strongly supports the self-selection of more productive firms into export markets, but there has been more mixed evidence on the subsequent feedback effects of exporting on the future path of firm productivity. Several recent papers have introduced a new dimension into this export-productivity relationship: firm-level investments in productivity-enhancing activities such as R&D. James A. Costantini and Marc J. Melitz (2007), Alla Lileeva and Daniel Trefler (2007), and Paula Bustos (2006) explore the linkages between investments in innovation, productivity, and the decision to export in the context of the liberalization of trade regimes. Aw, Roberts, and Tor Winston (2007) have also found a significant role for firm R&D investments in explaining Taiwanese firm export patterns, as well as interaction effects between firm R&D and export choices in explaining productivity change. In this paper we summarize some empirical results from our research project to develop an estimable structural model of the joint exportinvestment decision. In the theoretical model, firms invest in R&D and physical capital, which can affect the path of future productivity for the firm. R&D investment, through its effect on future productivity, increases the profits from exporting, and participation in the export market raises the return to R&D investments. The theoretical model yields equations for the policy functions for R&D investment, physical investment, and the exporting decision, as well as the evolution of firm-level profitability, that can be estimated with micro datasets containing R&D Investments, Exporting, and the Evolution of Firm Productivity