The Extensive and Intensive Margins of Exports: The Role of Innovation

An important prediction of trade theories is that innovation can improve a country’s export performance. Using data on patents granted by the US as a proxy for innovation and data on manufacturing exports from 105 countries over the period 1975–2001, I investigate the extent to which innovation increases the number of products traded (the extensive margin) and the export value of each product (the intensive margin). The empirical results show that (i) innovation has a positive and significant effect on both the extensive and intensive margins. The intensive margin contributes 70 per cent of the effect, and the extensive margin accounts for 30 per cent. (ii) The effect of innovation on exports is stronger for low‐income countries than for high‐income countries. (iii) More innovative countries export greater quantities and charge higher prices, suggesting that innovation increases the product quality of exports.