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

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.