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A Global View of Creative Destruction

We formulate a two-country model of trade and creative destruction by domestic and foreign firms. In the model, trade liberalization quickens the pace of creative destruction and facilitates the flow of technology across countries. The resulting dynamic gains from idea flows are at least as large as the static gains from trade. In our model, such international idea flows are essential for understanding why country technologies do not drift apart, and for matching key properties of export dynamics at the firm level. First, contracting firms are more likely to lose exports than domestic sales, whereas expanding firms are more likely to gain domestic sales than to gain exports; exports are vulnerable to foreign as well as domestic creative destruction, whereas domestic sales are comparatively insulated from foreign creative destruction by trade barriers. Second, in our model, comparative advantage is constantly shifting across countries due to global creative destruction, which generates the ample turnover of exports across product categories observed in the data.

wp2005.pdf (605.91 KB)
Chang-Tai Hsieh
Peter J. Klenow
Ishan Nath
Publication Date
October, 2021