How does Product Innovation Affect Export Margins?

The previous studies on the factors affecting trade margins emphasize the importance of exogenous trade costs; however, the role of product innovation has not been thoroughly investigated. Product innovation activities of a firm directly determine how efficiently its product matches the target consumers’ preferences and in turn significantly affects a country's trade growth patter. Therefore, we attempt to explain the driving factors of trade growth by observing and examining the efficacy of product innovation strength on trade margin. This paper sheds light on how product innovation affects the dual margins of export growth. The research results have shown that product innovation promotes the expansion of extensive margin (Proposition 1) * Corresponding Author, School of Economics and Management, Southeast University, China. Email: [email protected] ╂ School of Economics and Management, Southeast University, China ╂ ╂ School of Economics and Management, Southeast University, China and product innovation negatively affects intensive margin when the overall level of product innovation in a certain country (or industry) is very low (Proposition 2). Using micro-level data from Chinese manufacturing firms, our empirical results are in line with our theoretical hypothesis. In other words, product innovation significantly promotes the extensive margin of Chinese export while the impact of product innovation on the intensive margin is negative. Furthermore, the effects of product innovation on export margins are significantly different among industries with differentiated characteristics. Relevant policy recommendations are obvious. In order to maintain the sustainability of trade growth, a country should balance the internal and external equilibrium of development path and take a variety of measures to actively guide firms to enhance product innovation strength. To achieve a healthy and balanced trade development the government should encourage more firms to enter into the international market.