Three Essays on Innovation in an Open Economy

In this dissertation, I examine selected open economy determinants of innovation input and output. One chapter explores the linkages between relative national prices and R&D expenditures, and two other chapters look specifically at trade in innovative tasks. In the first chapter of my dissertation, entitled Industrial Research and Development and Exchange Rate Depreciation in a Small Open Economy, I examine the effect of the changes in relative national prices, as measured by industry-specific real exchange rates, on industrial R&D expenditures in a small open economy. Previous findings put emphasis on sectoral heterogeneities that are driven merely by R&D or exporting activities, and the results are not conclusive. In this chapter, I incorporate R&D capabilities, exporting activities, and sectoral heterogeneities in pass-through elasticities into a partial equilibrium model of R&D expenditures to advance our understanding of firms\u27 innovative efforts in a small open economy where relative national prices play an important role. I employ this model to predict how changes in industry-specific real exchange rates affect the R&D expenditures of a representative firm. Given the marginal profitability of R&D capabilities, the direction of R&D responses in this model depends upon the pass-through behavior of the firms: under some regularity conditions about the pass-through elasticities, an exchange rate depreciation is expected to adversely affects the R&D expenditures in those industries where the domestic and foreign prices are less sensitive to the changes in spot exchange rate. Employing data from a panel of industries in Korea, I test the predictions of the model. The results verify that a lagged depreciation in the industry-specific real exchange rate has an adverse effect on industrial R&D expenditures. Exploring the effect of industry-level heterogeneities in pass-through elasticities, the results suggest that this adverse effect is particularly evident among highly concentrated industries with high export shares, which are expected to have relatively low pass-through. In the second chapter of my dissertation, entitled An Empirical Assessment of the Effects of Trade in Innovative Tasks on Innovation Output, I study the effect of trade in innovative tasks, as measured by off-shoring R&D, design and engineering activities, on the extensive and the intensive margins of innovation output. Firm level observations in this study are taken from a recent survey of about 14,750 firms in seven European countries. This survey provides me with a wide range of control covariates as well as useful instrumental variables, which enable me to address the potential for reverse causality and identify the parameter of interest. The IV results indicate that those multinational corporations that off-shore their innovative activities are 60% more likely to innovate, and the share of innovative product sales in their total turnover is 35% greater than similar firms. I also find that trade in innovative tasks is beneficial when such trade is in product innovation, but not when such trade is in process innovation. This paper is forthcoming in the Southern Economic Journal. In the third chapter of my dissertation, entitled Productivity and Trade in Innovative Tasks, I use a representative sub-sample of the same firm-level survey as in the second chapter to examine the productivity premium of those firms that partake in trade in innovative tasks. For this sub-sample I have access to an estimated productivity measure, which enables me to explore the heterogeneities in productivity. The results suggest that, compared to the other firms in the full sample and also to the sub-sample of multinational firms, those that off-shore their innovative tasks enjoy a productivity premium. In fact, I find that those firms are more productive than firms that off-shore the production of their finished products or their semi-finished products/components. This may explain why, despite the estimated gains from trade in innovative tasks, only a small number of multinational corporations partake in this specific task trade