Pian Shu, Harvard Business School
Pian Shu, Harvard Business School
Foreign Competition and Domestic Innovation: Evidence from U.S. Patents
Foreign Competition and Domestic Innovation: Evidence from U.S. Patents
11 Apr 20161:00 PM – 2:30 PM
Faculty and doctoral students only
Location:
Baker Library | Bloomberg Center 103
Organizer:
Manufacturing is the locus of U.S. innovation, accounting for more than three quarters of U.S. corporate patents. The rise of import competition from China has represented a major competitive shock to the sector. We study how U.S. manufacturing firms have responded to this shock. The impact of increasing product market competition on innovation is theoretically ambiguous. On the one hand, greater import penetration resulting, for example, from deepening supply chains in Asia, may reduce overall U.S. presence in industries where opportunities for innovation are most abundant. On the other hand, foreign competition may increase domestic innovation within industries by encouraging firms to concentrate on product segments that are more intensive in R&D or to engage in defensive innovation within existing segments. We confront two empirical challenges in assessing how rising import competition has affected U.S. innovation. We map all U.S. utility patents granted by March 2013 to firm-level data using a novel internet-based matching algorithm that corrects for a preponderance of false negatives when using firm names alone. And we contend with the fact that patenting is highly concentrated in certain product categories and that this concentration has been shifting over time. From 1991 to 2007, patenting increased strongly in computers and electronics, industries that also registered a large rise in import exposure. Patents decreased by equal measure in chemicals, a sector with little change in foreign competition from China. Superficially, this would suggest that rising competition has spurred innovative activity. Accounting for strong secular trends in innovative activities in these two broad sectors, however, we find that the impact of the change in import exposure on the change in patents produced is strongly negative. It remains so once we add an extensive set of further industry- and firm-level controls. Rising import exposure also reduces global employment, global sales, and global R&D expenditure at the firm level. It would appear that a simple mechanism in which greater foreign competition induces U.S. manufacturing firms to contract their operations along multiple margins of activity goes a long way toward explaining the response of U.S. innovation to the China trade shock.