APL (Ajiken Power Lunch)

Thursday, 22nd of May, 12:00 to 1:15 p.m.

IDE-JETRO C22 Meeting Room 　

I develop a new model where sectoral knowledge diffusion affects the optimal innovation of firms during trade shocks. In the model, large firms and small firms compete in the market, with only large firms engaging in innovation. Changes in trade costs influence market concentration, which in turn alters the level of knowledge diffusion. The impacts on innovation depend on pre-shock level diffusion rates, with sectors that exhibit higher rates being less affected by trade cost changes. Despite the positive correlation between diffusion and innovation, this suggests that sectors with higher diffusion are more resilient to trade cost shocks. I test the model using comprehensive firm-level data from Chinese and U.S. firms, focusing on two major events --- WTO accession and trade wars between the US and other countries. I find the results align with the model's predictions in both cases. The model highlights that optimal policy responses to trade shocks should be tailored based on sectoral diffusion levels.

Professor Qianxue Zhang (GraSPP, the University of Tokyo)

Yuta Watabe