A Global View of Creative Destruction

We formulate a two-country model of trade and creative destruction by domestic and foreign firms. In the model, trade liberalization quickens the pace of creative destruction and the flow of technology across countries. International idea flows are essential for understanding why country technologies do not drift apart and for matching two empirical facts. First, contracting firms are more likely to lose exports than domestic sales, whereas the opposite is true for expanding firms. Second, the product composition of a country’s exports exhibits ample turnover. In our model, a country’s comparative advantage is constantly shifting due to global creative destruction.