Does Innovation Cause Exports? Evidence from Exogenous Innovation Impulses and Obstacles Using German Micro Data

Trade and growth theories predict a mutual causation of innovation and exports. We test empirically whether innovation causes exports using a uniquely rich German micro dataset. To overcome the potential endogeneity, we need to identify variations in innovations that are exogenous to export performance. Our identification strategy takes advantage of a unique micro dataset of an innovation survey of German manufacturing firms. In this survey, the firms do not only report about their innovation behavior, their export share and other relevant control variables, but also whether specific impulses furthered their innovation and whether specific obstacles hindered their innovation. By using certain innovation impulses and obstacles that are credibly exogenous to the firms’ export performance as instruments for the actual innovative activity, we can identify variations in innovations that are exogenous to exports. We argue that this instrumental variable strategy yields estimates of the causal effect of innovation on exports in an industrialized country. In this paper we use as reference models a simple OLS framework and also a Tobit model to account for the relatively high share of non-exporters. Both models are then compared with their instrumental variable counterparts, a linear two-stage least square model and an IV Tobit model. We find that innovation attributable to this variation leads to an increase of about 10 percentage points in the export share of German manufacturing firms. The evidence is robust to several alternative specifications and similar for product and process innovations.