On the Link Between Innovation, Markups and Exporting

Abstract: The relationship between innovation, markup and exporting is complex and any empirical analysis is likely to contain both self-selection and simultaneity biases. I use recently developed GMM estimation techniques to recover time-varying markups at the firm level. I then cast these into a simultaneous-equation framework to estimate the influence of R\&D investments on markups and export behavior of Swedish manufacturing firms. My analysis shows that firms can significantly improve their domestic market power through innovative investments. Moreover, a one percentage point increase in the markup gives rise to a 0.013 per cent export surge per employee on average. This confirms the hypothesis that, through innovation, firms establish domestic market power before turning to foreign markets.