The heterogeneous impact of market size on innovation

The evolution of a firm's export markets influences its innovation decisions. French manufacturing firms patent more when they are subject to a foreign demand shock, i.e. when their export markets exogenously grow more. The increase in the number of patents is visible two to five years after such a demand shock, highlighting the time needed to innovate.

This effect is entirely attributable to the initially most productive firms. In addition to its effects on innovation, a foreign demand shock has a positive and immediate impact on the sales and employment of firms, regardless of their productivity.