Innovation, trade and multi-product firms

This paper contributes to the literature on the relationship between innovation and exports by developing a model that emphasizes the role of product innovation in explaining heterogeneity in export behaviour both across and within firms. The dynamic model assumes that firms invest to maintain and increase the portfolio of products they sell: innovation is a stochastic process whereby the probability to capture new business opportunities is a function of the number of goods already sold. Crucially, the model assumes two independent mechanisms to drive the extensive and the intensive margins of a firm's export. The resulting lack of (built-in) correlation between the two margins is well reflected in the data and represents the main contribution of our theoretical framework. The model is consistent with several other empirical regularities that characterize multi-product firms, such as the heavy tail in the distribution of the number of products exported by each firm, the strict hierarchy in the sales of products across markets, the substantial degree of product churning and the highly skewed distributions of export sales.