Innovation Responses to Import Competition

Abstract

How does trade liberalization that raises a country’s import competition aect the innovative activity of its rms? We exploit the strong growth of Chinese exports resulting from China’s entry into the World Trade Organization in 2001 as a competitive shock to, specically, Mexican manufacturing rms. Innovation is captured through information on the adoption of detailed rm level production techniques such as just in time inventory methods, quality control measures, and job rotation among the Mexican rms. Our results indicate that China’s rise in global trade did not aect Mexico’s rate of innovation by much, which contrasts with the substantial gains that others have found in the case of bilateral liberalizations. At the same time, there is a striking heterogeneity in the responses across rms for dierent productivities, with productive rms innovating more and less productive rms innovating less, which leads to positive selection in that initial dierences in rm performance are sharpened by the advent of new competition. We discuss the implications of these ndings for theories of trade and innovation.

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