The Impact of Trade Policy on Innovation : Evidence from Patent Data∗

This paper tests the effect of trade liberalization during the Great Liberalization of the 1990s on innovation in 48 countries using international firm-level patent data. The empirical strategy exploits ex-ante differences in firms’ exposure to different markets, allowing us to construct various firm-specific measures of trade barriers. This provides a novel source of firm-level variation that enables us to establish the causal impact of trade policy on patenting. Our results suggest that trade liberalization has economically significant effects on innovation and, ultimately, technical change. According to our estimate, about 6 percent of knowledge creation during the 1990s can be explained by trade policy. Furthermore, we find that the increase in patenting reflects more innovation, rather than simply more protection of existing knowledge. Finally, a more detailied analysis of the channels through which trade liberalization affects firms’ innovation allows us to to conclude that the positive impact resulting from increased competition and larger market size prevail on the negative Schumpeterian force. ∗We thank Bjarne J. Kvam from the Norwegian Industrial Property Office for helpful clarifications and comments. †University of Oslo, federica.coelli@econ.uio.no ‡University of Oslo, CEPR & NBER, andreas.moxnes@econ.uio.no §University of Oslo & CEPR, k.h.ulltveit-moe@econ.uio.no