US policy makers are concerned with increasing innovation as a means of improving its competitiveness in the world as indicated by the American Competitiveness Initiative. Because of the US's world wide lead in innovation and R&D in the information and service industries, net export growth in the US is increasingly concentrated in service industries. Among the fastest growing U.S. export sectors are information services, such as motion pictures, software, sound recordings, and TV programming. Information services are also at the center of recent debates on global trade policy, including how to enforce intellectual property rights across national borders and whether countries should protect domestic cultural goods against competition from imports. Despite the importance of services to U.S. trade, very little research has been conducted on the sector; instead empirical international trade research has focused almost on entirely on trade in manufactures. The lack of research may be partly due to lack of neither data on trade in services as neither the U.S. government nor international institutions produce disaggregated data on trade in information services or other service industries.
The proposed research project will rectify this situation by developing a theoretical model of international trade in information services and apply it to U.S. exports of motion pictures. A key difference between exports of manufactures and exports of information services is that the former tend to involve variable production costs in the country of production while the latter tend to involve production costs in the country of consumption. This difference induces producers of information services to concentrate production in large markets, such as the U.S. When exporting services involves fixed costs and service providers are subject to idiosyncratic shocks, the number and type of services traded vary widely across markets. The research will use the theoretical framework to derive a difference-in-difference gravity model of trade in which a country's imports of U.S. motion-picture services relative to its expenditure on domestically produced motion-picture services depends on the country's size relative to the U.S., proximity to the U.S. in terms of culture and geography, policy trade barriers, and other trade costs. Bilateral trade in manufacturing serves as a control group.
The intellectual merit of this research is to show how market size and trade costs affect international trade in motion picture services relative to international trade in manufacturing. The motion picture industry is one in which American innovation far outpaces those of the rest of the world. Motion pictures are an attractive case to study because bilateral trade in the industry is easily measured at the point of consumption, making data available at relatively low cost. The empirical application will examine the impact of size of the market in contributing to the global concentration of the motion-picture industry in the U.S. By identifying the factors that determine international specialization in services, this project will help inform global debates about the impact of trade barriers on the information-service industry. More important, the result of this research will give indications as to how the US can take advantage of innovation in the motion picture industry in order to improve it competitiveness in the world. An important practical contribution of this research will be the creation of a new data set on international trade in motion-picture and other information services, which will be available to the research community.
