Protect or Compete? Evidence of Firms’ Innovation from Import Penetration

Changjie Hu () and Ming Liu
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Changjie Hu: Holzschuh College of Business Administration, Niagara University, Lewiston, NY 14109, USA
Ming Liu: Sobey School of Business, Saint Mary’s University, Halifax, NS B3H 3C3, Canada

JRFM, 2023, vol. 16, issue 4, 1-17

Abstract: This paper reassesses the long-debated relationship between market competition and firms’ innovation. While competition is traditionally measured at the industry level using historical data, our study utilizes two recently developed text-based measures of competitive threats which are forward-looking and constructed at the level of individual firms. We address the potential endogeneity concerns and provide causal inference using instrumental variables including import tariffs and trade-weighted exchange rates, along with the propensity score matching (PSM) of firms that experienced exogenous shock from import competition. Our results show that an increase in competition unambiguously promotes firms’ innovation in terms of both quality and quantity.

Keywords: innovation; product market competition; patents; import penetration; import tariffs; exchange rates; text-based measures (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2023
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