Does Import Competition Spur Innovations?

Abstract

We examine the impact of import competition on firms’ innovation input and output. We conjecture that U.S. firms view import competition from high-wage countries (HWCs) as “neck-and-neck” competition and will respond by intensifying innovation. In contrast, U.S. firms will reduce innovation in response to import competition from low-wage countries (LWCs), because such competition does not always increase the potential benefits from innovation. Our empirical results are supportive. We find that, when confronting HWC import competition, U.S. firms increase R&D expenditures, file more patents, receive more citations to their patents, and produce more breakthrough patents. Moreover, U.S. firms closest to the technological frontier — largest firms, firms with the largest stocks of knowledge, and most profitable firms — intensify innovation the most in response to HWC competition. These results shed light on the relationship between product market competition and innovation, and on the impact of trade on firm performance.