Enter the Dragon: Import Penetration and Innovation

Abstract

We examine the effect of Chinese import penetration on the innovation activities of US manufacturers. We find that firms boost innovation in response to greater import penetration. The boost in innovation builds on narrow focus and familiar technology and results in greater product differentiation. However, in the years after the import penetration, 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 Chinese import penetration spurs US firms to rapidly, but temporarily, increase innovation to dodge price competition.