Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 930: Cross-Industry Heterogeneity in Export Participation: The Role of Scale Economies in R&D

Shon Ferguson ()
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Shon Ferguson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: This paper shows that the R&D intensity of an industry plays an important role in determining international trade patterns via its e¤ect on scale economies. I first develop a model of trade with heterogeneous firms where firms compete with each other by spending on fixed product development costs such as R&D. The model predicts that a larger share of firms are exporters in industries where R&D is a large component of total costs. The model also predicts that R&D-intense industries are less sensitive to trade costs. I find empirical support for these predictions using firm-level data for Swedish manufacturing industries. The results also highlight the importance of controlling for firm size when measuring the firm extensive margin of exports.

Keywords: International Trade; Trade Costs; Endogenous Sunk Costs

JEL-codes: F12; L11; O30

30 pages, October 5, 2012

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