The effect of domestic and foreign trade coordination on technological innovation: complements or substitutes?

Lijuan Xie,Xiaodong Wang,Shixun Wang

doi:10.1186/s11782-017-0014-6

Lijuan Xie, Xiaodong Wang + Show 1 more

Open Access

https://doi.org/10.1186/s11782-017-0014-6

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Abstract

Based on the theory of technology spillover in international trade, this paper discusses the technological innovation effect of trade by taking the influence of domestic trade into account. Under the constraint of the production possibility frontier, there is either complementarity or substitutability between domestic and foreign trade. It must be decided whether resources should be concentrated in one of the sectors (trade specialization) or instead allocated equally (trade equalization) between the two sectors. This paper firstly discusses how domestic trade and foreign trade work together to influence technological innovation, and how trade equalization and specialization affect different types of innovation. Using a provincial-level panel dataset from 2007 to 2015 in China, this paper constructs the indicators of domestic and foreign trade linkage and examines the impact of trade on innovation. The findings show that trade equalization mainly promotes incremental innovation, while trade specialization improves radical innovation. Thus, in the area of incremental innovation, attention should be paid to the equalized development of domestic and foreign trade, while in areas pursuing radical innovation, emphasis should be put on the specialization of the trade sector, avoiding equal allocation of resources to the two sectors.

Highlights

In Solow’s economic growth model, when a country’s capital-labor input reaches a stable state, the technical level is the driving force leading to further economic growth, and technological innovation is an important source of technological progress
This paper argues that the interaction between domestic and foreign trade can affect the technological spillover effect by improving competition, imitation and upstream and downstream contact, etc., which will affect technological innovation
The results support the hypothesis that trade equalization strengthens incremental innovation more effectively while trade specialization is more beneficial to radical innovation

Summary

Introduction

In Solow’s economic growth model, when a country’s capital-labor input reaches a stable state, the technical level is the driving force leading to further economic growth, and technological innovation is an important source of technological progress. Developing countries, are often forced to be low-locked in the global value chain due to their own resource endowments, division of global value chains and various other reasons (Gereffi, 1999; Cramer, 1999) Another feasible idea is to promote technological spillover by strengthening the diffusion effect of the industrial sectors, in which processes of domestic trade can play a role by adjusting the matching of production and demand, and by reducing inter-regional market fragmentation (Zhang Hao, 2014). In view of the correspondence of time between the dependent and independent variables, the number of patent applications will better reflect the effect on technological innovation on domestic and foreign trade coordination of the current period rather than the previous periods.

Findings

Design

Conclusions and discussions