Trade in Services and Innovation

We study the implications of services trade for firm innovation. Using a quasi-experimental shift-share design, we find that access to foreign knowledge-related services improves the innovativeness of domestic firms and complements their indigenously sourced R&D. To confront this evidence, we develop a theoretical model. It demonstrates outsourcing can foster firms’ innovation efficiency by mitigating decreasing economies of scale in in-house innovation efforts. As a result, firms become more likely to outsource innovation efforts as they become more innovative, whereas the prevalence of offshoring depends on its associated trade costs.

Krieger, Bastian and Fabian Trottner (2024), Trade in Services and Innovation, ZEW Discussion Paper No. 24-056, Mannheim.