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

Johan Hombert and Adrien Matray

Journal of Finance, 2018, vol. 73, issue 5, 2003-2039

Abstract: 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 R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.

Date: 2018
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