DP11664 Foreign Competition and Domestic Innovation: Evidence from U.S. Patents
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, which in theory could benefit or stifle innovation. In this paper
we empirically examine how rising import competition from China has affected U.S. innovation.
We confront two empirical challenges in assessing the impact. 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. Accounting for secular trends in innovative activities,
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.
