ECONOMIC ANALYSIS WORKING PAPER SERIES Asymmetric trade liberalization, sector heterogeneity and

Innovation, mark-ups and the degree of trade openness vary substantially across sectors. This paper builds a multi-sector endogenous growth model to study the inuence that asym-metric trade liberalization and sectorial di¤erences in the degree of product market competition has on the e¤ect of trade openness on R&D investments at a \u85rm level. I \u85nd that di¤erences in the degree of competition generate large di¤erences on \u85rm innovative response to trade liberalization. A movement from autarky to free trade promotes innovation and productivity growth in those sectors which are initially less competitive. However, when the initial tari ¤ level is common across sectors, a homogeneous tari ¤ reduction promotes innovation in those sectors which are initially more competitive. The paper suggests that trade liberalization could be a source of industry productivity divergence: \u85 rms that are located in industries with greater ex-posure to foreign trade, invest a greater amount in R&D contributing to industry productivity growth. Finally the paper \u85nds that these asymmetries generate important reallocative e¤ects that contribute to enlarge these di¤erences