Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

89 Pages Posted: 24 Dec 2014 Last revised: 25 Oct 2017

See all articles by Johan Hombert

Johan Hombert

HEC Paris - Finance Department

Adrien Matray

Princeton University

Multiple version iconThere are 2 versions of this paper

Date Written: May 30, 2017

Abstract

We study whether R&D-intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax-induced changes to R&D cost. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (by about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained R&D allowing firms to increase product differentiation. As a result, while firms in import-competing industries cut capital expenditures and employment, R&D-intensive firms downsize considerably less.

Keywords: R&D, Innovation, Product Market Competition, Trade Shocks

JEL Classification: G31, F14, O33

Suggested Citation

Hombert, Johan and Matray, Adrien, Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China? (May 30, 2017). HEC Paris Research Paper No. FIN-2015-1075, Available at SSRN: https://ssrn.com/abstract=2542495 or http://dx.doi.org/10.2139/ssrn.2542495

Johan Hombert (Contact Author)

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Adrien Matray

Princeton University ( email )

Bendheim Center for Finance
26 Prospect Avenue
Princeton, NJ 08540
United States

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