Essays on International Trade: Demand Volatility, Exporting and the Adoption of Innovations.

Abstract

This dissertation comprises three essays on two themes in international trade - volatility and innovation. I explore how volatility influences exporters' choices of foreign destinations, how innovation is spurred by export participation and foreign investment, and how countries adopt a policy innovation - a treaty that facilitates the creation of enforceable international trade contracts. In the first chapter, I develop a simple model of trade with heterogeneous firms facing stochastic demand. As those firms incur adjustment costs in response to market fluctuations, the model predicts that fewer firms will enter destinations with high demand volatility - those destinations are less profitable. I test the prediction using data on the universe of Chinese exports at the firm level. The data show that fewer exporters serve destinations with high demand volatility. The second chapter of the dissertation compares the effects of foreign direct investment and exporting on product innovation. Governments in many developing economies try to stimulate innovation and private-sector growth with policies that promote exports or attract foreign investment. Using a rich firm level database of Chinese manufacturing and industrial enterprises, I show that exporting is a stronger predictor of product innovation than foreign investment. Firms that receive foreign investment tend to engage in more product innovation, but not at the same level as the firms that learn by exporting. The third dissertation chapter discusses the adoption of innovations. The policy innovation I consider is a trade treaty that allows private parties to create enforceable international trade contracts, even in the absence of a common legal jurisdiction. Private international arbitration between importers and exporters are enforced by the national courts of signatories to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC). This treaty makes private international arbitration a viable legal alternative to trading on reputation or self-enforcement. Surprisingly, many countries waited decades to join the NYC despite the obvious benefits. I show in this chapter that peer effects contribute to countries' adoption of the treaty. Countries with regional trade agreement partners that are NYC members have a higher hazard of participating in the treaty.