Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

  • JOHAN HOMBERT
  • ADRIEN MATRAY

Article first published online: 5th June 2018 DOI: 10.1111/jofi.12691

Abstract


We study whether R&D‐intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax‐induced changes to R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.

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