DP6500 Trade Liberalization, Competition and Growth

Author(s): Omar Licandro, Antonio Navas-Ruiz
Publication Date: September 2007
Keyword(s): Competition and growth, R&D, Trade openness
JEL(s): F13, F43, O3
Programme Areas: International Macroeconomics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6500

The aim of this paper is to understand whether international trade may enhance innovation and growth through an increase in competition. We develop a two-country endogenous growth model, both countries producing the same set of goods, with firm specific R&D and a continuum of oligopolistic sectors under Cournot competition. Since countries produce the same set of goods, trade openness makes markets more competitive, reducing prices and raising the incentives to innovate. More general, a reduction on trade barriers enhances growth by reducing domestic firms market power.