Production, Exports, and R&D Strategies: A Dynamic and Heterogeneous Analysis

Abstract This paper develops a dynamic model of firms with heterogeneous production levels making optimal decisions regarding exports and R&D investment, and both choices endogenously affect firms’ production growth. In a closed economy, firms determine how much to invest in one of two R&D strategies: independent innovation or dependent imitation. In an open economy, firms decide not only on R&D investment but also on whether and how much to export. To comprehensively capture firm-level growth dynamics, the model incorporates both self-selection and learning-by-exporting mechanisms. Our model identifies production thresholds which determine whether firms choose to export, and whether to imitate or to innovate. As expected, only sufficiently productive firms choose to export. Notably, the most productive non-exporters choose to innovate, while the most productive exporters prefer imitation. Additionally, as firms become more productive, they tend to reduce both their R&D investment and the proportion of production they export. This paper then moves further to seek for support from the empirical evidence. Based on panel data of global firms observed from 2011 to 2019, multiple tests robustly support these theoretical findings, confirming that complex multilateral relationships exist among firms’ production, exports, and R&D strategies. The paper concludes with a discussion of findings and policy implications. JEL codes: F14; F17; O12; O33; D22