The negative effects of the US-China trade war on innovation: Evidence from the Chinese ICT industry

Abstract

Many countries, including China, have gradually realized the importance of leading innovation capabilities in the world market. The innovation capabilities of the information and communication technology (ICT) industry have received widespread attention as an important means to stimulate a productivity revolution in the new era and its innovative development. This paper adopts a differences-in-differences method and treats the US-China trade war as a quasi-natural experiment to empirically analyze its impact on technological innovation in the Chinese ICT industry. The results find that the US-China trade war has a significant negative impact on ICT firms' technological innovation, mainly by increasing their operating costs, and that the negative impact of the trade war is much greater than the positive impact from the reverse incentive effect. Moreover, the decline in technological innovation of ICT firms is mainly due to the reduction in innovation efficiency caused by the decrease in the number of patent applications for inventions with the highest technological content, rather than the change in R&D investment. In the US-China trade war, firms with low financing constraints and non-state enterprises are more significantly affected. Thus, it can be seen that the intention of the US-China trade war to inhibit the development of Chinese high-technology firms has been achieved to a certain extent, which requires new countermeasures from the Chinese government.