Trade reforms, competition, and innovation in the Philippines

What is the impact of the removal of barriers to trade on the firms` innovative activities? Does the increase in competition arising from trade reforms lead to increases in innovation? This paper attempts to examine the link between trade liberalization and innovation using firm panel data on the Philippine manufacturing industry. With the framework of Impulliti and Licandro (2009, 2010) as guide, a two-stage approach is tested where trade and innovation are linked via competition. A reduction in tariffs leads to an increase in competition as price cost margins fall due to the increase in the number of players in the domestic market. With the reduction in price cost margins, profits fall and increases the productivity threshold above which firms can operate profitably. This forces inefficient firms out of the market and resources are reallocated from exiting firms to the higher productivity surviving firms which innovate at a faster pace. The results show that trade liberalization has significant positive impact on innovation through competition. -- Trade ; Competition ; Innovation ; Philippine manufacturing