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Innovation, Trade and Finance

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  • Christian Keuschnigg
  • Peter Egger

Abstract

The paper proposes a model where heterogeneous firms choose whether to undertake R&D or not. Depending on R&D choice, innovative firms are more productive, have larger investment opportunities and lower own funds than non-innovating firms. As a result, innovative firms are financially constrained while standard firms are not. The efficiency of the financial sector and a country's institutional quality relating to corporate governance determine the share of R&D intensive firms and the comparative advantage in innovative goods. We show how protection, R&D subsidies and financial development improve access to external finance in distinct ways, support the expansion of innovative industries and boost national welfare. International welfare spillovers depend on the interaction between terms of trade effects and financial frictions and may be positive or negative, depending on foreign countries' trade position.

Suggested Citation

  • Christian Keuschnigg & Peter Egger, 2010. "Innovation, Trade and Finance," University of St. Gallen Department of Economics working paper series 2010 2010-08, Department of Economics, University of St. Gallen.
    • Handle: RePEc:usg:dp2010:2010-08
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    More about this item

    Keywords

    Innovation; financial development; R&D subsidies; protection;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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