Escaping Chinese Import Competition? Evidence from U.S. Firm Innovation (Job Market Paper)

This paper examines the impact of competition from Chinese imports on innovation by U.S. public manufacturing firms. Exploiting cross-industry and over-time trade variations from 1991 to 2004, I find that when Chinese imports surged into the U.S. market, U.S. public manufacturing firms increased their number of patents as a response. In addition, U.S. public manufacturing firms appeared to adopt horizontal differentiation as a strategy to escape Chinese competition; they were more likely to patent in new technology classes and to enter new product markets. I also document differential responses to Chinese import competition across firms. While large firms were responsible for the increase in patents and horizontal differentiation, small firms significantly reduced their R&D expenditures and were more likely to exit. Finally, I provide novel evidence on the channel of adjustment: new inventors to the firms were responsible for almost all of the increased innovation. When Chinese import penetration intensified, inventors were more likely to leave small firms and go to large firms. JEL Codes: F1 L1 L6 M2 O3 ∗Managerial Economics and Strategy, Kellogg School of Management, Northwestern University, IL, 60208 (email: [email protected]). I am greatly indebted to my dissertation committee chair, Benjamin Jones, for his supervision, support, and continued guidance throughout the research process. I am also thankful to my committee members – Thomas Hubbard, David Dranove, and Marti Mestieri – who provided invaluable advice. This work has benefited particularly from the comments of Nicolas Bianchi, Craig Garthwaite, George Georgiadis, Sara Moreira, Elena Prager, Lee Branstetter, Yang Yao, Rafaella Sadun, Rocco Macchiavello, John Asker, and seminar participants at Kellogg, Northwestern University, and Zhongnan University of Economics and Law. All errors are my own.