Enter the Dragon: Import Penetration and Innovation
35 Pages Posted: 3 Aug 2017
Date Written: June 2017
We examine the effect of Chinese import penetration on the innovation activities of US manufacturers. We find that firms boost innovation in anticipation of greater import penetration. The boost in innovation relies on familiar technology and results in greater product differentiation. However, after the import penetration has settled, the firms gradually and significantly reduce innovation. As an ancillary finding, we document that import competition prompts firms to scale back capital expenditures. Combined, our evidence suggests that the expectation of Chinese import penetration spurs US firms to innovate to dodge price competition.
Keywords: Import penetration, Innovation, Patents
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