After a recent increase in Chinese import competition, European firms increased innovation. We present and rationalise these patterns using ‘trapped factors’ at the micro level within a stylised equilibrium model of product-cycle trade and growth. Trade integration of the magnitude observed between the OECD and low-wage nations as a whole can considerably increase the long-run growth rate and welfare. In the short run exposed firms devote trapped factors to increased innovation, leading both to increased innovation at these individual firms as well as to a small amount of extra transitional growth overall. China accounts for half of the dynamic trade gains.
Nicholas Bloom, Paul Romer, Stephen Terry and John Van Reenen
1 January 2021
The Economic Journal 131(633) , pp.156-191, 2021
DOI: 10.1093/ej/ueaa086
https://academic.oup.com/ej/article/131/633/156/5867760
This work is published under POID and the CEP's Growth programme.