The effect of the U.S.–China trade war on Chinese corporate innovation: A curse or a blessing?

Leona Shao-Zhi Li (), Yize Liu and Jia Yuan ()
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Yize Liu: University of Macau
Jia Yuan: University of Macau

No 202418, Working Papers from University of Macau, Faculty of Business Administration

Abstract: Exploiting tariff variations during the U.S.–China trade war, we find that the U.S. tariff escalation is associated with a relative increase in corporate expenditure on research and development by listed Chinese manufacturing companies. Through a novel approach that infers the degree of competitive pressure from textual analyses of company annual reports, we identify an induced competition mechanism and offer evidence that is consistent with escape-competition motives. The marginal treatment effect is more pronounced for firms initially in neck-to-neck competition industries. Our findings are robust to various sensitivity tests and we consider different approaches of addressing the potential endogeneity concern. This is among the pioneering studies to examine the impact of adverse foreign trade shock on innovation responses in the source country, thus contributing with scholarly and policy implications in the face of rising protectionism.

Keywords: U.S.–China trade war; tariff shocks; corporate innovation; escape-competition; textual analysis (search for similar items in EconPapers)
JEL-codes: F13 F14 L60 O31 O32 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2024-08
New Economics Papers: this item is included in nep-cna and nep-int
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