Effects of Intermediate Input Tariff Reduction on Innovations in China
HKIMR Working Paper No.02/2017
56 Pages Posted: 22 Feb 2017
Date Written: February 21, 2017
Innovation plays a key role in economic growth. In this paper, we investigate the effects of intermediate input tariff reduction on the innovation activities of domestic firms. Input tariff reduction has two opposite effects on the innovation decision of a firm: it may promote innovation because the cost of innovation activities decreases, but it may also result in a decrease in innovation because foreign technologies become cheaper. We use Chinese firm-level data from 1998 to 2007, which features a drastic input tariff cut in 2002 because of China's WTO accession, and find that input tariff cut results in less innovation undertaken by Chinese firms. The findings are obtained using the difference-in-differences technique and are robust to various specifications checks of the model. We also provide a theoretical framework to generate insights to the empirical findings.
Keywords: Trade liberalization, Intermediate Input, Innovation, Patent
JEL Classification: F13, F15, O14, O31
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