Firm R&D Investment and Export Market Exposure

In this paper, we estimate a dynamic structural model of a rm s decision to invest in R&D and use it to measure the expected long-run bene t from R&D investment. We apply the model to German rms in ve high-tech manufacturing industries and distinguish rms by whether they sell in just the domestic market or also export some of their production. We nd that R&D investment leads to a higher rate of product and process innovation among exporting rms and these innovations have a larger impact on productivity improvement in export market sales. As a result, exporting rms have a higher payo from R&D investment, invest in R&D more frequently than rms that only sell in the domestic market, and, subsequently, have higher rates of productivity growth. The endogenous investment in R&D is an important mechanism that leads to a divergence in the long-run performance of rms that di er in their export market exposure.