Does Import Competition Induce R&D Reallocation? Evidence from the U.S.

48 Pages Posted: 7 Aug 2017 Last revised: 3 Oct 2017

See all articles by Kaiji Gong

Kaiji Gong

Stanford University

Rui Xu

International Monetary Fund (IMF)

Date Written: September 26, 2017

Abstract

We analyze the impact of rising import competition from China on U.S. innovative activities, both at the firm level and at the industry level. Using Compustat firm-level data, we explore how U.S. manufacturing firms respond to Chinese competition by adjusting their R&D expenditures. As import competition is measured for each four-digit SIC industry, we identify both an average effect and a reallocation effect on R&D expenditures. Specifically, import competition induces R&D to be reallocated towards more productive and more profitable firms within each industry, even though firms on average reduce R&D expenditures. When we aggregate the firm-level effects at the four-digit industry level and for the whole manufacturing sector, the reallocation effect is large enough to offset the negative average effect. In addition, our analysis using employment data suggests that rising competition from China in manufacturing has led to reallocation of researchers towards booming service industries, including business and repairs, personal services, and financial services.

Keywords: Chinese Import Competition, R&D Expenditures, Reallocation, Researchers

JEL Classification: F14, O30

Suggested Citation

Gong, Kaiji and Xu, Rui, Does Import Competition Induce R&D Reallocation? Evidence from the U.S. (September 26, 2017). Available at SSRN: https://ssrn.com/abstract=3013441 or http://dx.doi.org/10.2139/ssrn.3013441

Kaiji Gong

Stanford University ( email )

Stanford, CA 94305
United States

Rui Xu (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://https://sites.google.com/site/ruixuwebsite/

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