The Effect of Innovation on International Trade: Selected Medium-High-Technology Industries, Evidence on Iran+3

The relationship between technology and international competitiveness dates back to the neo-technological trade theories of the 1960s. This approach considers difference in technology as the primary motive for difference among nations in terms of trade performance. The technology gap approach emphasizes inter-country differences in innovativeness as the basis for international trade flows. The gravity equation is the most successful and celebrated empirical model in international Trade. The empirical gravity literature does not include any form of multilateral resistance in the analysis. The importance of using fixed effects to control for country-specific characteristics has been emphasized in an influential paper by Anderson & Van Wincoop (2003). This paper investigates the effect of innovation on international trade. It examines the impact of R&D as a proxy of innovation on three medium high-tech industries exports in Iran, Japan, Korea and Australia using panel data method over a period of 10 years. We incorporate an industry-specific intercept into the model for estimating the role of innovation in explaining industry-level trade across selected countries. Our findings show that innovation has a positive and economically large effect on export performance of all industries. This suggests innovation is a central driver of trade.