Exports, product differentiation and knowledge spillovers

Empirical studies on aggregate export behavior have recently emphasized the role played by innovation as the main force driving product differentiation and competitiveness for developed countries. These studies treat foreign innovation as a variable that affects negatively national export shares. We incorporate the impact of foreign innovation in a standard new trade theory model and find that, if knowledge spillovers exist, foreign knowledge accumulation could even have a positive effect on national exports. We then test the model using aggregate export data for a set of 21 OECD economies and find that the foreign stock of knowledge affects exports positively for the less advanced countries in the sample and negatively for the G7 economies.