Trade Tariffs Are Toxic for Exporters Investing in R&D
Research
Trade tariffs, as they are currently being debated in parts of politics and even introduced, put a severe strain on export-oriented companies. Not only do they lead to price increases for consumers, but they also reduce the returns from research and development (R&D) for exporting companies. This entails the risk that exporters in particular will be deterred from making important investments in R&D in the future. This is all the more serious as companies selling their products on international markets invest significantly more in R&D than companies operating only on their home market. These are the findings of a study conducted by the ZEW – Leibniz Centre for European Economic Research in Mannheim.
For the analysis, the researchers have developed an empirical model that illustrates the entire innovation process of a company, including the uncertainties to which innovative companies are exposed. This model allowed the authors of the study to simulate the effects of possible trade restrictions in the future.
They found that the introduction of trade tariffs on exports of ten per cent severely reduces the sales opportunities for exporters abroad. As a result, the long-run returns to R&D investment fall by at least 20 per cent on average across all sectors considered in the study. The proportion of companies investing in R&D decreases by 2.0 to 7.5 percentage points. This, in turn, leads to a 0.3 to 1.7 per cent drop in firm-level productivity. Retaliation measures taken by German policymakers in the form of additional import duties of ten per cent would lead to further losses in R&D and productivity.
The aim of the study is to investigate whether and to what extent the return to R&D differs between companies that are active both in their home market and in foreign markets and those that sell their products solely in their home market. To this end, the researchers drew a sample of companies from the five high-tech sectors of chemistry; mechanical engineering; electronics and electrical engineering; medical, measurement, control and regulation technology; and vehicle construction. The study considered almost 1,300 national and international companies with headquarters in Germany in the period from 1994 to 2008. ZEW’s Mannheim Innovation Panel (MIP), an annual survey on the innovation behaviour of the German economy, served as the database.
Exporting companies show higher innovation rate
The results show that investments in R&D by exporting companies are more likely to lead to new products and processes. Exporters display a higher innovation rate (91.3 per cent) than companies which solely focus on the German market (76.8 per cent). The new products and processes also lead to higher productivity gains for exporters. Companies which only focus on the German market obtain an average productivity gain of 2.3 per cent when introducing new products and processes. For exporters, the productivity gains achieved with new products and processes rise to 6.6 per cent in the German market and 9.4 per cent in foreign markets. In addition, with an annual depreciation rate on productivity gains of 14 per cent compared to 21 per cent, productivity gains by exporting companies are more sustainable in future years and thus contribute to profit increases over a longer period of time.
Across all sectors, the long-term rate of return to R&D of companies which are only active in Germany ranges from about 1.0 per cent of the firm value in mechanical engineering to 2.4 per cent in electronics and electrical engineering. By contrast, the long-term return to R&D for exporting companies is 4.6 to 10.8 per cent of the firm value.
Companies choose to carry out R&D mainly when the expected returns exceed the projected costs. If a company is active in foreign markets, this has a positive influence on the innovation result. “The access to new technological knowledge on foreign markets makes the successful development of new products and processes more likely. And those new or improved products are not only sold on the domestic market, but also internationally, which means that the higher the turnover, the higher the return to R&D investment. This development, in turn, has a positive impact on the company’s willingness to innovate, as well as on its productivity growth and thus on future corporate profits,” concludes Professor Bettina Peters, deputy head of the ZEW Research Department “Economics of Innovation and Industrial Dynamics” and one of the authors of the study.
