ESSAYS ON TRADE AND INNOVATION

Abstract

This dissertation examines the interactions between international trade and innovation, highlighting their rich heterogeneity. The first chapter introduces the distinction between research and development to the trade literature and shows that globalization shifts firms’ focus from research toward development. The second chapter, leveraging global firm-level data, confirms that foreign direct investment (FDI) facilitates cross-border knowledge diffusion while revealing its heterogeneous effects, which depend on factors such as host-country absorptive capacity and investment type. The third chapter provides empirical evidence that well-designed industrial policies can effectively stimulate firms’ innovation and export activities. Together, these chapters offer new insights into how firms’ innovation strategies adapt to international economic forces and policy interventions, with broader implications for trade and innovation policy. In the first chapter, I show that globalization has shifted U.S. corporate innovation from scientific research to commercial development. Analyzing data from publicly traded firms, I find that substantial tariff reductions at export destinations following the ``Uruguay Round'' led U.S. firms to focus on a narrower range of technologies, reducing their emphasis on scientific research. To explain these findings, I develop a multi-product firm model that distinguishes between research and development. Globalization—represented by expanded market size or lower trade costs—reallocates profits toward products for which firms hold a competitive advantage. Consequently, firms increasingly prioritize developing core products over broader research. The model embeds a crucial welfare trade-off: development increases the supply of high-productivity products, but research enhances the overall innovation efficiency of the economy through knowledge spillovers. Calibration to U.S. manufacturing firms shows that allowing separate decisions on research versus development amplifies the productivity gains from globalization but reduces welfare gains. The welfare-maximizing policy suggests that research subsidies should exceed development subsidies, particularly after globalization, to counteract the decline in research share. The second chapter (co-authored) investigates the impact of Foreign Direct Investment (FDI) on knowledge diffusion by examining how firm-level FDI activities influence cross-border patent citations. (This chapter is from a joint work with JaeBin Ahn, Nan Li, and Andrea Manera.) We construct a novel firm-level panel dataset that combines global utility patent data with project-level information on greenfield FDI and cross-border mergers and acquisitions (M&A), covering 60 countries over two decades. Applying a new local projection difference-in-differences methodology, we find that FDI significantly enhances knowledge flows both from and to investing firms, with stronger effects observed for greenfield FDI compared to M&A. Our results also reveal substantial heterogeneity in FDI spillovers: host countries with higher innovation capacity or greater technological similarity to the investing firm benefit disproportionately, while countries with lower absorptive capacity capture fewer gains. In addition, we also uncover knowledge spillovers beyond the targeted firms and industries, particularly in sectors closely connected in the technology space. The third chapter (co-authored) empirically examines the impact of industrial policies on firm innovation and exports. (This chapter is from a joint work with Luis F. Jaramillo.) Specifically, we examine South Korea’s first “mission-oriented” R&D program, implemented between 1992 and 2001, and its impact on innovation and economic outcomes. Using newly compiled textual data and a language model to identify targeted and control technological classes, we exploit an exogenous source of variation: some planned research projects were not implemented due to budget shocks. We apply a local projections event study to compare the outcomes of targeted and control technological classes. Despite no differential trends before the program, ten years after its extension, future-citation-weighted patenting output in the targeted classes had doubled, and real exports had tripled relative to the control classes. These findings remain robust in cross-country evidence. Moreover, we find that technological classes with less concentrated patenting activity before the program drive the results. Our findings suggest that technology policy played a crucial role in South Korea’s transition to a knowledge-intensive economy.