DP10666 Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?

Author(s): Johan Hombert, Adrien Matray
Publication Date: June 2015
Keyword(s): China, import competition, innovation, R&D tax credit
JEL(s): F14, L25, L60, O33
Programme Areas: Industrial Organization, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10666

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 the cost of R&D. On average across US manufacturing firms, rising imports from China lead to slower sales growth and lower profitability. These effects are, however, significantly smaller for firms with a larger stock of R&D -- by about half when moving from the 25th percentile to the 75th percentile of the R&D stock distribution. As a result, while the average firm in import-competing industries cuts capital expenditures and employment, R&D-intensive firms downsize considerably less.