Innovation in GMOs, technological gap, demand lag, and trade

The nexus of innovation and trade is commonly analyzed in terms of technological gaps and market‐share gains for innovating countries. However, this relationship may not hold under certain circumstances – as in the case of genetically modified organisms. Based on a firm heterogeneity model, this study investigates the role of technological gaps and demand lags in the case of international trade in goods after the emergence of a ‘highly‐scrutinized’ or ‘distrusted’ technology. The demand lag may be understood as the difference between techniques employed by producers in exporting countries and levels of acceptance or compatibility in destination markets. Likewise, a technological gap is the difference between techniques employed by late‐movers and those used by leading countries. By means of a gravity equation, we empirically estimate these effects based on the bilateral trade of soybeans between 1995 and 2012. Results indicate that both technological gaps and demand lags reduce trade by similar magnitudes. Thus, producing countries should carefully weigh the negative effects of falling behind and of approving varieties not approved for importation in destination markets. [EconLit citations: F12, F51, O33]