Productivity & Economic Growth Factors

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Questions and Answers

In the conceptual framework provided, which of the following is considered an input factor that directly influences productivity?

  • Market Integration
  • Domestic Market
  • Technology (correct)
  • Foreign Market

According to the content, what is predominantly evidenced as a driver of economic growth?

  • Domestic Competition
  • Exporting (correct)
  • Market Integration
  • Protectionism

Which complementary policy is highlighted as important for ensuring technological development?

  • Labor Regulations
  • Trade Barriers
  • Material Subsidies
  • Infrastructure (correct)

Based on the conceptual framework, which element directly mediates between productivity and the domestic/foreign markets?

<p>Outputs (B)</p> Signup and view all the answers

According to the references, which factor did Autor, Dorn, Hanson, Pisano, and Shu (2017) investigate in relation to domestic innovation?

<p>Foreign Competition (B)</p> Signup and view all the answers

In the context of market dynamics within the conceptual framework, protectionism is specifically designed to shield against what?

<p>Foreign Competition (A)</p> Signup and view all the answers

According to the reference materials, which of the following papers examines the impact of trade liberalization on productivity through intermediate inputs?

<p>Amiti and Konings (2007) (C)</p> Signup and view all the answers

How do complementary policies enable technology development that leads to economic growth?

<p>By ensuring technological development through infrastructure, institutions, and human capital. (C)</p> Signup and view all the answers

According to the analysis presented, how does a reduction in trade costs primarily affect firms that were initially non-exporters?

<p>It decreases their profits due to a fall in the price index, making domestic sales less lucrative. (D)</p> Signup and view all the answers

When trade costs fall, what is the expected impact on the number of firms in an industry?

<p>The number of firms increases because higher expected profits attract new entrants. (B)</p> Signup and view all the answers

What was the main goal of Argentina joining MERCOSUR in the early 1990s?

<p>To gradually reduce bilateral tariffs to zero with Brazil, Paraguay, and Uruguay. (C)</p> Signup and view all the answers

In the context of Bustos' study on Argentina, which firms are most likely to upgrade their technology following a tariff reduction?

<p>Firms at the middle of the productivity distribution. (D)</p> Signup and view all the answers

How did Bustos measure technology spending (ST) in the Argentina study?

<p>By calculating the total expenditure on computers, software, technology transfers, patents, equipment and innovation-related labor and materials. (B)</p> Signup and view all the answers

What is the predicted impact of falling trade costs on firms' export behavior and technology adoption?

<p>More firms export and increase technology spending. (A)</p> Signup and view all the answers

What does the 'innovation index' used in the Argentina study primarily measure?

<p>The share of positive responses to questions about innovation activities. (C)</p> Signup and view all the answers

According to the material, what direct impact on firms occurs when export revenues increase because of reduced trade tariffs?

<p>More firms begin to export and upgrade their technology to compete effectively. (D)</p> Signup and view all the answers

According to the framework presented, how does increased competition in the domestic market directly affect a firm's target market?

<p>It primarily affects the output market. (C)</p> Signup and view all the answers

In the context of import competition, what is the core difference between the Schumpeterian effect and the escape competition effect on innovation?

<p>The Schumpeterian effect reduces post-innovation rents, while the escape competition effect reduces pre-innovation rents. (D)</p> Signup and view all the answers

Firms weigh the trade-off between profits from innovating and not innovating. Which of the following equations best represents this decision-making process?

<p>$\text{Pre innovation rents} &lt; \text{Post innovation rents} - \text{innovation cost}$ (B)</p> Signup and view all the answers

According to Schumpeter's idea, how does import competition influence a firm's incentives to innovate?

<p>It diminishes incentives by reducing the prospective rents from innovation. (C)</p> Signup and view all the answers

According to the inverted U-shape theory of innovation, what happens to a laggard firm's incentive to innovate as duopoly profits significantly decrease?

<p>The incentive to innovate decreases, leading to less innovation. (D)</p> Signup and view all the answers

Based on Arrow's 'escape competition' idea, how does import competition affect a firm's pre-innovation rents and subsequent incentives to innovate?

<p>It decreases pre-innovation rents, thereby increasing the incentives to innovate. (B)</p> Signup and view all the answers

What is the primary outcome of the Schumpeterian effect on innovation due to import competition?

<p>It reduces post-innovation rents. (D)</p> Signup and view all the answers

What is the primary implication of the 'inverted U-shape' relationship between competition and innovation, as suggested by Aghion et al. (2005)?

<p>Innovation initially increases with competition, but decreases after a certain level. (D)</p> Signup and view all the answers

According to the model presented, what is a key assumption about the number of firms considered when analyzing innovation decisions?

<p>The model is based on two firms. (C)</p> Signup and view all the answers

Under what market condition does the Schumpeterian effect most significantly impact innovation?

<p>When laggard firms have a low chance of catching up. (D)</p> Signup and view all the answers

Considering both the Schumpeterian and Escape Competition effects, what is a likely outcome in an industry where firms face a substantial import competition shock?

<p>The innovation behavior will depend on whether the reduction in pre-innovation or post-innovation rents is more significant. (B)</p> Signup and view all the answers

How does the 'escape competition effect' influence firms that are neck-and-neck in the market?

<p>It reduces the 'pre-innovation rents' and increases the incentive to innovate. (C)</p> Signup and view all the answers

What is the primary effect of 'trapped factors' on a firm's innovation strategy?

<p>It reduces the opportunity cost of innovation, encouraging more innovation. (D)</p> Signup and view all the answers

How do managerial private benefits and X-inefficiency relate to the 'preference effect' on innovation?

<p>They increase innovation as managers maximize their own benefits, potentially at the firm's expense. (D)</p> Signup and view all the answers

According to the empirical evidence regarding import competition, what is a common trend observed in the United States and Canada?

<p>Negative effects on innovation. (A)</p> Signup and view all the answers

In contrast to the United States and Canada, what is a typical effect of import competition observed in Europe and developing countries?

<p>A positive impact on innovation rates. (B)</p> Signup and view all the answers

What mechanism underlies the 'escape competition effect' that drives innovation?

<p>Decreasing pre-innovation rents. (C)</p> Signup and view all the answers

How do 'trapped factors' differ from typical production factors in their influence on innovation strategy?

<p>They reduce the opportunity cost of innovation because they are difficult to reallocate. (B)</p> Signup and view all the answers

According to the listed references, how might trade liberalization impact Argentinian firms?

<p>It encourages technology upgrading and export activity. (A)</p> Signup and view all the answers

According to the references, what is a potential outcome of import competition, considering the preferences of managers?

<p>An increase in productivity, especially if managers have heterogeneous preferences. (D)</p> Signup and view all the answers

Based on the references, how might increased trade with China affect innovation, IT adoption, and productivity in other countries?

<p>It can induce technical change, impacting innovation, IT, and productivity. (D)</p> Signup and view all the answers

What role do imported intermediate inputs play in the domestic product growth of a country, as suggested by the references?

<p>They foster domestic product growth. (A)</p> Signup and view all the answers

How does the concept of 'economic development as self-discovery' relate to trade and industrial policy?

<p>It implies that countries should discover their unique capabilities through experimentation and adaptation. (B)</p> Signup and view all the answers

In what way can trade contribute to a shift from unproductive to productive entrepreneurship, according to the references?

<p>By encouraging innovation and efficiency in resource allocation. (C)</p> Signup and view all the answers

What does Hart's (1983) perspective on the market mechanism suggest regarding incentives?

<p>The market mechanism serves as a scheme of incentives. (C)</p> Signup and view all the answers

According to the references, what factors might mediate the impact of China’s growth on the global economy?

<p>The presence of 'trapped factors'. (D)</p> Signup and view all the answers

According to the presented framework, how does increased import competition primarily affect firms?

<p>By intensifying competition in the domestic market. (B)</p> Signup and view all the answers

How might access to new or higher quality intermediate inputs affect a firm's production?

<p>It can make production more efficient or lead to higher quality products. (D)</p> Signup and view all the answers

A reduction in tariffs on imported goods leads to increased competition in the output market and improved access to foreign inputs. What is the primary analytical challenge in determining the overall impact of this change on domestic firms' innovation?

<p>Disentangling the separate effects of increased competition and access to inputs. (A)</p> Signup and view all the answers

In the context of trade liberalization, how would increased access to imported intermediates most likely impact product innovation?

<p>Firms would likely produce new varieties or higher quality varieties. (C)</p> Signup and view all the answers

A country's trade liberalization policy results in local firms facing stiffer competition from abroad, but simultaneously allows them cheaper access to higher quality intermediate goods. According to Amiti and Konings, what is an unclear outcome of this policy mix with respect to domestic firms?

<p>The overall effect on domestic firms' decisions to innovate. (D)</p> Signup and view all the answers

Imagine a domestic manufacturing firm can now import higher-quality components due to a new trade agreement. Which scenario would provide evidence that access to improved inputs is the primary driver of increased profitability, rather than merely surviving increased output market competition?

<p>The firm introduces a new, technologically advanced product line that was previously impossible to produce. (B)</p> Signup and view all the answers

Suppose a firm benefits from both increased access to foreign markets and increased competition in its domestic market due to trade liberalization. Which strategy would best leverage both of these changes?

<p>Investing in innovation to develop higher-quality products for export. (C)</p> Signup and view all the answers

A company in a developing country begins importing advanced manufacturing equipment, leading to higher production efficiency and better quality products. However, it also faces stiffer competition from foreign firms selling similar products. Which outcome would suggest that the access to advanced machinery is having a more significant impact than the increased competition?

<p>The company's market share decreases, but its overall profitability increases significantly. (B)</p> Signup and view all the answers

Flashcards

Market Interactions

Domestic markets face increased competition, while foreign markets offer increased access.

Inputs

Resources used in production, such as labor, materials and machinery.

Outputs

Goods or services produced from inputs.

Import Competition

When domestic firms face competition from imported goods.

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Labor

Skills, effort, and number of workers available.

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Export Opportunities

Opportunities for domestic firms to sell their goods in foreign markets.

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Materials

Raw items transformed during production.

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Foreign Input Competition

Competition from foreign suppliers for inputs used in domestic production.

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Access to Imported Intermediates

Access to cheaper or better quality intermediate goods from foreign markets.

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Machinery

Tools and equipment to enhance production.

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Productivity Factors

Technology, Labor, Material and Machinery.

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Schumpeterian Effect

Import competition reduces potential profits from innovation.

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Focal Industry

Industry of primary interest being analyzed.

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Escape Competition Effect

Import competition reduces pre-innovation profits, pushing firms to innovate to survive.

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Inverted U-Shape

Effect where initial increase in competition boosts innovation, but excessive competition reduces it

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Protectionism

The degree to which a country shields its domestic industries from foreign competition.

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Duopoly Innovation Incentive

When a duopoly's profits decrease, it reduces incentives for laggards to innovate, leading to decreased innovation.

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Inverted U-Shape in Innovation

This concept suggests innovation initially rises with competition, then falls, before rising again.

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Trapped Factors Effect

This effect increases innovation by cutting the opportunity cost of immobile factors within a firm.

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Preference Effect

This effect positively impacts innovation.

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Managerial Slack

Managers enhance personal benefits, leading to X-inefficiency and managerial slack, affecting innovation indirectly.

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Effect of Import Competition

Import competition can influence firms.

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Import Competition in Europe/Developing Nations

Import competition often shows positive or mixed effects across Europe and developing nations.

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Import Competition in US/Canada

For countries like US and Canada, import competition can have negative effects

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Tariff Reduction: Firm Exit

Falling tariffs lead to more firms exiting the market.

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Tariff Reduction: Export Increase

Falling tariffs lead to more firms starting to export their products.

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Tariff Reduction: Tech Upgrade

Falling tariffs motivate existing exporters to improve and adopt better technology.

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Tariff Reduction: Increased Entry

Expected profits increase, more firms will enter the industry. Affects non-exporters more.

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Trade Cost Reduction: Profit Tilt

In the model, falling trade costs cause the profit functions to tilt, affecting non-exporters

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Mid-Productivity Firms: Tech Upgrade

Firms with productivity levels in the middle range are most likely to upgrade technology when tariffs fall.

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MERCOSUR

Launched in March 1991, it aimed to gradually eliminate bilateral tariffs among Argentina, Brazil, Paraguay, and Uruguay by December 1994.

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Technology Spending (ST)

Reflects spending on technology (computers, software, tech transfers, patents, equipment, materials and labor related to within-firm innovation).

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Trade's Impact on Innovation

Trade can affect firm innovation by increasing competition in the domestic market and expanding access to foreign markets.

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Competition Types in Trade

Import competition affects the output market, while foreign input competition affects the input market.

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Market Impact of Trade factors

Export opportunities affect the output market. Access to imported intermediates affects the input market.

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Benefits of Imported Inputs

Access to imported intermediates can lower costs, introduce new inputs, and provide access to better technology.

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Outcomes of Better Inputs

Access to better intermediates leads to increased profits, higher quality products and new varieties.

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Trade Liberalization

Trade liberalization reduces tariffs, increasing competition and access to cheaper/better inputs.

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Two effects of trade liberalization

Trade liberalization has effects on the output market for domestic firms and increases access to inputs for domestic firms

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Amiti & Konings Research Focus

Amiti & Konings researched the specific effects of access to intermediate inputs on innovation.

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Trade-Induced Technical Change

Examines how increased trade, particularly Chinese imports, drives innovation, IT adoption, and productivity improvements in other economies.

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Trapped Factors

Explores how certain factors get 'stuck' or are slow to adjust, influencing global growth patterns in response to China's economic impact.

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Trade Liberalization & Tech Upgrading

Analyzes how trade liberalization and export activities lead to technological advancements and upgrades within Argentinian firms.

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Import Competition & Manager Preferences

Studies the impact of import competition on firm productivity, considering the diverse preferences and decision-making styles of managers.

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Imported Inputs & Product Growth

Explores the effects of using imported intermediate inputs on the growth of domestic products within a country, using evidence from India.

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Trade, Investment, & Industrial Policy

Covers the roles of trade, foreign investment, and industrial policy in fostering development within developing countries.

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Market Mechanism as Incentive

Describes how the market system, with its price signals and competition, acts as an incentive for firms to innovate and be efficient.

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Economic Development as Self-Discovery

Suggests that economic development is a process where countries discover their comparative advantages and specialize accordingly.

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Study Notes

  • Globalization and Innovation are the current lecture topics.
  • The lecture is given by Professor Claudia Steinwender, PhD, LMU

Slowbalization

  • The world is not experiencing deglobalization, but rather a slowdown in globalization, or "slowbalization"
  • Trends in world exports of goods and services reveal this slowbalization

Causes of Slowbalization

  • Inequality
  • Covid-19
  • Russian invasion of Ukraine.

Concerns Regarding Globalization

  • Globalization does not cause rising inequality across countries.
  • Globalization does lead to rising inequality within countries.
  • Globalization does eliminate manufacturing jobs in developed countries.
  • Countries have not become too dependent on each other.
  • National security may become compromised by trading with enemy countries.
  • Globalization could be used to fund war efforts of enemy countries. .

Tariffs and Trade Restrictions

  • There has been a reduction in tariffs and trade restrictions.
  • Since WW2, there has been a surge in regional trade agreements (e.g., EU).
  • More countries are accessing the World Trade Organization (WTO).
  • A second presidency of Donald Trump could increase tariffs.
  • Tariffs of up to 60% on China and up to 20% on the EU have been threatened.
  • Retaliatory tariffs will most likely follow.
  • It is important to consider the competitiveness and economic growth of countries like Germany, especially when considering restricting globalization and introducing tariffs.

How Globalization Influences Innovation

  • Trade in goods and services encourages innovation in firms.
  • Foreign direct investment (FDI) spurs innovation.
  • Migration contributes to innovation.
  • Knowledge flows promote innovation.
  • Both direct and indirect effects (spillover effects) foster innovation.

Trade's Impact on Firm Innovation

  • Trade in goods and services affects innovation depending on the market
  • Output market with increased competition in domestic market leads to import competition
  • Output market with increased access to foreign market leads to export opportunities
  • Input market with increased competition in domestic market leads to foreign input competition
  • Input market with increased access to foreign market leads to access to imported intermediates

Export Opportunities' effect firm's

  • Firms can sell more cheaply to foreign consumers.
  • Market size effect: the potential output market's size increases
  • Potential mechanisms: the size of the potential output market increases, rents to a specific innovation increase while costs remain the same, marginal investments become more attractive, which is highly relevant for exporters and potential exporters.
  • Induced competition increases the industry's attractiveness and encourages more competition.
  • Additional competition affects how much innovation (see import competition channel) and is relevant for non-exporters and exporters.

Export Market Access

  • Firms have an initial productivity φ (phi).
  • Firms can choose to export.
  • This involves a fixed exporting cost (fx).
  • This also means there is additional revenue, which depends on the initial productivity levels.
  • Firms can improve their technology
  • There is a fixed cost for innovation (ηf).
  • Initial productivity is improved to γφ (gamma phi).
  • There are four choices total: -Choice 1 - Not exporting (d), tech stay (1) yields profits Ï€d(φ). -Choice 2 -Exporting (x), tech stay (1) yields profits Ï€x(φ). -Choice 3 - Not exporting (d), tech improvement (h) yields profits Ï€h(φ). -Choice 4 - Exporting (x), tech improvement (h) yields profits Ï€xh(φ).

Optimal Firm Choices

  • A firm's choice depends on their productivity φ (firms use the largest profit function).

What Occurs When Trade Costs Decrease?

  • Direct Effect - Export revenues increase: more companies export or upgrade technology.
  • Indirect Effect Through Increased Entry - Expected profits improve (before establishments know productivity and expectations are over all possible instances of productivity), more companies enter, dropping prices and raising profits for exporters.
  • Graphically, the two export profit functions will tilt up, and the two domestic profit functions will tilt down.

What Occurs Overall With Decreasing Trade Costs?

  • The number of companies exiting increases.
  • Exporting firms increases.
  • Companies export and enhance technology more.
  • It is new in Bustos [2011] compared to Melitz [2003]

Bustos' Empirics Test

  • Tariffs decreasing causes upgrades in mid-productivity distribution firms
  • There should be a higher quantity leaving with tariffs down
  • Argentina early 1990s was the setting
  • March 1991 saw MERCOSUR Launch
  • Argentina, Paraguay, and Brazil
  • Gradual zeroing of bilateral tariffs happening between 1991 and 1994 December.
  • Argentina firm level numbers taken between 1992-1996
  • Spending has technology element including payments for transfer and patents and computers for instance
  • The innovation index measures yes answers to questions related to innovation

Import Competition Effects

  • Schumpeterian effect, negative on innovation.
  • Escape competition effect, positive on innovation.
  • Trapped factors, positive effect on innovation.
  • Preference effect, positive on innovation.

Schumpeterian vs Escape Effects

  • Firms weigh innovating against non-innovating
  • (Ï€ not innovate) smaller or equal to (Ï€ innovate)
  • Pre innovation rents smaller or equal to Post innovation rents – innovation cost
  • Schumpeterian idea: import reduces post-innovation rents and reduces incentives to innovate
  • Escape idea: import Reduces pre-innovation rents which increases incentives to innovate

Further insight on Effects

  • Schumpeterian effect where rents from innovation are potentially reduced
  • Escape competition effect where pre innovation rents are decreased because share shrinks
  • Trapped factors positive where moving costs opportunity is reduced
  • Preference effect is positive
  • Inverted U explained has two key components firms innovating based on competition and if firms chose not to innovate, they share duopoly which hinges greatly on level of comp

Industrial Policy

  • The best Industrial policy is none (Gary Becker) 1958
  • Debate of Policy is not is one must do it but how you go forward.
  • Industrial policy (Stiglitz) is rightly so back in fashion in 2017
  • Industrial Policy, governments actions explicitly in line to transform the structure of economic activities while In pursuit of a more fair and just public goal
  • Includes structural change, goal is to promote, create jobs, innovation with tools with a wide net

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