Discussion paper

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

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.

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Citation

Hombert, J and A Matray (2015), ‘DP10666 Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?‘, CEPR Discussion Paper No. 10666. CEPR Press, Paris & London. https://cepr.org/publications/dp10666