R&D in trade Networks: The Role of Asymmetry

Countries differ substantially in their exposure to international trade as determined by the number of their trade partners. This exposure to trade and the asymmetry in trade exposure are anticipated by firms when making their R&D investments. We model a choice of R&D investments by firms in a given trade network focusing on the effects of the network asymmetry. The two large classes of networks considered include asymmetric hub-and-spoke networks and symmetric networks. We find that R&D, productivity and welfare are highest in a hub economy and lowest in a spoke, and the larger the degree of network asymmetry, the larger the difference. A country in a symmetric network exhibits intermediate levels of R&D and welfare, even if the number of its trade partners is the same as in a hub or in a spoke. This implies that regional/preferential trade agreements, which result in a highly asymmetric trade network, benefit hub economies but harm spokes. By contrast, multilateral trade agreements, which lead to a symmetric complete network, generate equal R&D and welfare benefits for all countries.