This paper examines how trade liberalization affects investments in R&D at the firm level. In
a model where entrepreneurs are heterogeneous in their wealth endowment, they rely
differently on external funds. In the presence of capital market imperfections, this implies
heterogeneous access to external funds such that poor entrepreneurs run smaller firms, are
less likely to invest in R&D, and more likely to exit the market. Decreasing trade costs
resulting from tariff reductions exacerbate these characteristics.  Using firm-level panel data
on seven Latin American countries for 2006 and 2010, we find support for our theoretical
predictions. While recent studies emphasize a positive impact of trade liberalization on
firms' productivity-enhancing activities, we provide novel evidence showing that financial
constraints can impair the effect on R&D efforts. To address potential endogeneity
concerns, we verify our findings using external financial dependence based on U.S. firms.
These results suggest that imperfect capital markets can prevent welfare gains from trade
liberalization to materialize.