DEPARTMENT OF ECONOMICS WORKING PAPER SERIES Technology Diffusion through Trade with Heterogeneous Firms

I investigate the long-run implications of trade and technology diffusion through trade, when firms are heterogeneous and trade is costly. The paper integrates firm heterogeneity and trade into product innovation growth models from endogenous growth theory. Two specifications of the R&D process are considered. In the first, R&D uses labor and intermediate goods; in the second, it uses labor and available technology. I find that under both specifications, exposure to trade increases average productivity. Furthermore, under the first specification exposure to trade always has a positive effect on economic growth, while it has an ambiguous effect on growth under the second. JEL Classification: F1, F3, L1, O3, and O4