This paper investigates the effect of export shocks on innovation. On the one hand a positive shock increases market size and therefore innovation incentives for all firms. On the other hand it increases competition as more firms enter the export market. This in turn reduces profits and therefore innovation incentives particularly for firms with low productivity. Overall the positive impact of the export shock on innovation is magnified for high productivity firms, whereas it may negatively affect innovation in low productivity firms. We test this prediction with patent, customs and production data covering all French manufacturing firms. To address potential endogeneity issues, we construct firm-level export proxies which respond to aggregate conditions in a firm's export destinations but are exogenous to firm-level decisions. We show that patenting robustly increases more with export demand for initially more productive firms. This effect is reversed for the least productive firms as the negative competition effect dominates.
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We document how demand shocks in export markets lead French multi-product exporters to re-allocate the mix of products sold in those destinations. In response to positive demand shocks,
those French firms skew their export sales towards their best performing products; and also ex-
tend the range of products sold to that market. We develop a theoretical model of multi-product
firms and derive the specific demand conditions needed to generate these product-mix reallo-
cations. These demand conditions are associated with endogenous price elasticities that satisfy
Marshall’s Second Law of Demand (the price elasticity of demand decreases with consumption). Under
these demand conditions, our theoretical model highlights how the increased competition from demand
shocks in export markets – and the induced product mix reallocations – induce productivity changes
within the firm. We then empirically test for this connection between the demand shocks and the
productivity of multi-product firms exporting to those destinations. We find that the effect of
those demand shocks on productivity are substantial – and explain an
important share of aggregate productivity fluctuations for French manufacturing
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