Innovation, technology diffusion, and income inequality under interdependent foreign market entry

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Technology is one of the main determinants of economic growth and prosperity. To raise the standard of living, existing technology needs to be improved and new technology needs to be invented. The world is characterized by a few technological leaders that accommodate the bulk of global innovation. Lagging countries, however, benefit from this technological progress as knowledge spills across industry and country borders. These spillovers contribute to the distribution of economic activity and thus income around the world. This research project aims at improving our understanding of the production and distribution of technology and its consequences in the global economy in a number of ways.The first contribution is methodological. The international trade literature largely ignores the interdependence of foreign market entry decisions. Interdependence means that the decision to export to one foreign market does not affect profits earned on the domestic market or on other foreign markets. While this is a simplifying assumption to ensure analytical tractability, it may come at the expense of estimating the welfare effects of international trade inaccurately. I suggest a novel stochastic approach to overcome the computational limitations. This approach has implications for numerous questions like learning from exporting, incomplete labor and credit markets, or global sourcing.The second major contribution is topical and applies the suggested approach to a number of questions. First, how does knowledge diffuse across borders (and potentially across sectors) and what role does this diffusion play for international trade flows, wages, and welfare? What is the role of interdependent market entry for estimating these effects? I extend a standard trade model by individual innovation decisions and technology diffusion. Structural estimation allows us to learn about economic channels and their magnitudes.In a second sub-project, I focus on multinational production. In addition to exporting, firms can choose additional foreign production sites from which they may potentially export to certain destinations. Such models have been widely applied in recent years stressing the relevance of multinational production to estimate welfare effects more accurately. However, recent work has ignored firm-specific technology decisions, knowledge diffusion and interdependent market entry. I am thus expecting novel insights for the estimation of welfare effects of international trade.A third interesting set of questions relates to inequality. How would countries' relative GDP look like with less or no diffusion of knowledge? What are the implications for within-country inequality? To address this aspect, I extend the model with incomplete labor markets to rationalize country-specific wage distributions that respond to the technology decisions of firms and the diffusion of knowledge.