Abstract:
I show that globalization has shifted U.S. corporate innovation from scientific research to commercial development. Analyzing data from publicly traded firms, I find that substantial tariff reductions at export destinations following the “Uruguay Round” led U.S. firms to focus on a narrower range of technologies, reducing their emphasis on scientific research. To explain these findings, I develop a multi-product firm model that distinguishes between research and development. Globalization—represented by expanded market size or lower trade costs—reallocates profits toward products for which firms hold a competitive advantage. Consequently, firms increasingly prioritize developing core products over broader research. The model embeds a crucial welfare trade-off: development increases the supply of high-productivity products, but research enhances the overall innovation efficiency of the economy through knowledge spillovers. Calibration to U.S. manufacturing firms shows that allowing separate decisions on research versus development amplifies the productivity gains from globalization but reduces welfare gains. The welfare-maximizing policy suggests that research subsidies should exceed development subsidies, particularly after globalization, to counteract the decline in research share.