The dynamics of trade and innovationa joint approach

Abstract

This paper analyzes the joint dynamics of internationalization and innovation decisions at the firm level. A main concern is to disentangle the observed persistence that arises from true state dependence from that emerging from firm heterogeneity, which could lead to spurious state-dependence. To this end, we use alternative econometric approaches, ranging from static pooled probit to dynamic random effects probit models that deal with the initial conditions problem. Later, we explicitly account for interdependence between these two decisions and cross-persistence by estimating a bivariate extension. Export and R&D participation are initially used as indicators of internationalization and innovation decisions, respectively. Then we extend the analysis to imports and alternative measures of innovation, particularly product and process innovations. The empirical analysis is carried out using a firm-level longitudinal dataset of Spanish manufacturing over the period 1990-2006.