How does Financing Affect R&D Responses to Import Competition?

Abstract

We examine the impact of Chinese import penetration on U.S. firms' R&D investment and subsequent performance, conditional on the access to financing. When import penetration rises, we find that old-highQ firms raise more debt while young-highQ firms raise more equity. As a result, young-highQ firms’ R&D investment, product differentiation and financial market performance decline. In contrast, old-highQ firms increase their in-process R&D but suffer declines in their accounting performance. We conclude that capital market funding is critical for young-highQ firms to continue R&D and capital investments to survive import competition. In particular, if young-highQ firms are able to secure funding before the advent of competition, they are also financially successful.

Keywords: Import penetration, R&D investment, Capital markets frictions

JEL Classification: D25, G32, O33