We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel of up to half a million firms over 1996-2007 across twelve European countries.We correct for endogeneity using the removal of product-specific quotas following China's entry into the World Trade Organization.Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms.These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000-2007.Rising Chinese import competition also led to falls in employment, profits, prices and the skill share.By contrast, import competition from developed countries had no effect on innovation.We develop a simple "trapped factor" model of innovation that is consistent with these empirical findings.
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