My PhD thesis broadly explores how a firm responds to a changing environment in international trade through three distinct topics. I examine how firms adjust their technology investment to foreign competition and demand, and how firm performance is affected by a global trade policy shock. And I investigate the dynamics of firms’ choices of invoicing currencies for exports over time. My first chapter studies how the choices of individual firms contribute to the dominance of a currency in global trade. Using a detailed administrative dataset for UK exporters’ extra-EU trade over 2010-2016, we document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarities: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market to stabilize its residual demand in that market. We show that the introduction of a fixed managerial cost into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings. We argue that these channels reinforce one another to drive and sustain dollar dominance in international trade. My second chapter empirically examines the propagation of the US-China tariff to other major countries’ exports to China in 2018-19. Using an industry-country specific measure of input-output linkages with China, I find that the US tariffs on Chinese imports had a significant adverse impact on other trading partners by dampening Chinese demand for foreign inputs. Evidence also suggests that the China’s retaliatory tariffs against the US and its most-favoured-nation (MFN) tariff cuts during the same period positively affected other countries in non-intermediate goods. However, the negative upstream effect of the US tariffs prevails in magnitude, resulting in a substantial fall in aggregate export to China. Firm-level analysis using a panel of Korean manufacturers lends further support to the importance of this vertical channel. The cross-border upstream propagation of local trade policy changes, as found in this chapter, illustrates how tightly productions are interconnected across countries and sectors, along with the rising importance of China in this global supply chain. My third chapter investigates the innovation response to trade shocks using matched administrative datasets for UK firms’ R&D expenditure and their trade exposures over 2002-2011. I find a strong adverse impact of import competition from China on UK firms’ R&D, as supportive of ‘Schumpeterian view’. No evidence is found that the improved access to Chinese inputs for individual firms offset this negative competition channel. Increased export demand, by contrast, significantly stimulates firms’ R&D. There is also heterogeneity in R&D responses depending on the firms’ initial conditions: (1) More productive firms increase their R&D by much more in response to export demand. (2) British exporters reduce R&D by less than non-exporters in the face of import competition from China. These findings together imply that innovation by purely domestic and less profitable firms was most hurt by globalization, leading to a widening productivity gap across firms.
Invoicing currency, Input-output linkage, Firm R&D
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