The Dynamic Impact of Exporting on Firm R&D Investment

Abstract

This article estimates a dynamic structural model of firm R&D investment in twelve Swedish manufacturing industries and uses it to measure rates of return to R&D and to simulate the impact of trade restrictions on the investment incentives. Export market profits are a substantial source of the expected return to R&D. R&D spending is found to have a larger impact on firm productivity in the export market than in the domestic market. Counterfactual simulations show that trade restrictions lower both the expected return to R&D and R&D investment level, thus reducing an important source of the dynamic gains from trade. A 10 percent tariff on Swedish exports reduces the expected benefits of R&D for the median firm by 18.6 percent and lowers the amount of R&D spending by 7.6 percent in the high-tech industries. The corresponding reductions in the low-tech industries are 20.6 and 5.5 percent, respectively. R&D adjustments in response to export tariffs mainly occur on the intensive, rather than the extensive, margin.