The effects of trade on research and development

This paper examines how U. S. manufacturing firms' research budgets respond to international trade. Using a simple dynamic model of R&D investment and dynamic heterogeneous panel estimation techniques developed by Peseran, Shin, and Smith (1999), firm-level data reveal that increased import competition tends to reduce the research efforts of purely domestic U. S. manufacturing firms. Firms with foreign sales, however, respond very weakly to import competition, and increase research efforts in response to real exchange rate depreciation.