Abstract
Studies measuring barriers to firm growth assume economies are closed, ignoring information on firm exports. We argue that this information is key to interpreting data and improving the accuracy of model predictions. To do this, we develop a dynamic model with export and domestic barriers. We show theoretically that the closed economy model underestimates barriers and amplifies counterfactuals. By calibrating the model to a set of European countries, we find that the quantitative difference is significant: for example, the closed economy model fails to see that Italian firms are very efficient exporters but poor innovators, and instead concludes that they are mediocre innovators. In terms of predictions, the closed economy model delivers an elasticity of welfare to innovation costs between 31 and 64 percent larger than the open economy model.
