Intermediated trade and innovation

Abstract

This study investigates how intermediaries shape exporters’ innovation decisions. Evidence from Chinese manufacturing firms suggests that direct exporters exhibit more innovation than those exporting indirectly through intermediaries. In addition, the transition from indirect to direct exporting correlates with higher innovation growth. To explain these facts, we develop a model incorporating international trade intermediaries and heterogeneous producers. The model demonstrates that direct exporting provides more incentives for firms to innovate than indirect exporting. Trade liberalization can encourage indirect exporters to switch to direct exporting, thereby promoting innovation. We test the empirical validity of the model’s predictions and quantify the aggregate impact of the innovation premium of direct exporters. This research provides a new viewpoint on trade liberalization and innovation.