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Innovation, trade and multi‐product firms

This paper contributes to the literature on multi-product exporters by developing a model that emphasizes the role of innovation in explaining heterogeneity in export behavior across both firms and products within the same company. We propose a dynamic model of the Luttmer (2011) type where firms invest to maintain and increase their portfolio of goods: the process of product innovation by incumbent firms is such that the probability to capture new business opportunities at home and abroad is a function of the number of goods already sold. This cumulative growth process gives rise to a heavy tail in the distribution of the number of products exported by each firm, which is consistent with the data. Such a markedly heterogeneous behavior across firms occurs even if we do not assume any heterogeneity in productivity to start with. Differences in export sales across products stem from the demand-side of the model, in the form of a product-specific preference attribute. We show that the model is consistent with several empirical regularities that characterize multi-product firms, such as the strict hierarchy in the sales of products across markets, the weak correlation between export scale and scope within each firm, and the substantial degree of product churning.