Abstract: Does foreign competition encourage innovation? This question has received renewed attention recently in two prominent papers by Autor, Dorn, Hanson, Pisano and Shu (2017) and Bloom, Draca and Van Reenen (2016) which come to different conclusions. We contribute to this area of research by exploring the link between innovation and import competition in China, a country that during the period we study (2000-2007) saw both a rapid increase in patenting and a lowering of import barriers due to accession to the WTO. Combining manufacturing firm survey data with customs and patent data, we find that import competition encouraged innovation, but only for the most productive firms. Those top firms see an increase in patenting rate 3.6 – 4% for every percentage point drop in import tariffs. The result is quantitatively similar whether we use a sector-wide tariff on output or a weighted tariff at the firm level as a measure of import competition. Consistent with the main finding, top firms also feature increased R&D expenditures and an increase in market shares following import liberalization. In addition, we find that in the face of more competition, top firms not only strengthen their core technology, but also enlarge the scope of their patent portfolio. Our empirical findings are consistent with a model of step-by-step innovation à la Aghion et al. (2009) where import competition generally discourages innovation by reducing sector-wide profits, but encourages firms close to the technological frontier to escape competition by increasing investments in R&D.
Exporting and Frictions in Input Markets: Evidence from Chinese Data (with Maria D. Tito), Finance and Economics Discussion Series 2017-077. Washington: Board of Governors of the Federal Reserve System. [Paper]
Abstract: This paper investigates the impact of international trade on input market distortions. We focus on a specific friction, binding borrowing constraints in capital markets. We propose a theoretical model where a firm’s demand for capital is constrained by an initial asset allocation and past sales. While the initial distribution of assets induces misallocation if the asset endowment at more productive firms does not fully cover their demand for capital, the dependence of the borrowing constraint from past sales proxies for cross-firm differences in the cost of default, which is empirically higher at larger firms. Overtime, an increase in sales relaxes the borrowing constraint; similarly, shocks to market access–such as opening to trade–contribute to easing the financial constraints, thus accelerating the convergence toward the frictionless allocation. To analyze the empirical relationship between market access and credit frictions, we draw on the annual surveys conducted by the Chinese National Bureau of Statistics (NBS) for 1998 to 2007, and we construct firm-level measures of distortions that control for firm heterogeneity. We find smaller labor and capital distortions across exporting firms; such distortions are even smaller in sectors where firms face lower tariffs or are more dependent on external financing, a proxy for the presence of binding financial constraints. Our empirical analysis also shows that export shocks significantly reduce the dispersion across input returns over time, with the effect mostly occurring at constrained firms. Our findings point to within-sector input reallocation as an important channel to overcome misallocation in open economies.
How the Breadth and Depth of Import Relationships Affect the Performance of Canadian Manufacturers? (with Matilde Bombardini, Keith Head, and Maria D. Tito) Submitted [Paper]
Abstract: This paper examines the relationship between a manufacturing firm’s import behavior and its performance. The focus is on two aspects of imports, input variety and the dynamics of import relationships. Firms importing more products from a larger set of suppliers tend to be larger, more productive and more successful in export markets. Not only the number, but also the duration of supply relationships matter. Firms maintaining a higher share of continuous supply relationships also benefit from size and productivity effects. Differences in suppliers’ countries of origin, instead, are associated with an unexpected result; namely, we find that more extensive use of Chinese suppliers is associated with poor export performance. These results suggest that the breath and depth of the import network are relevant factors for the performance of Canadian manufacturers, underscoring the importance of pursuing trade liberalization with new partners and trade facilitation with our established sources of suppliers.
Work in Progress
The Effect of the One Child Policy on Structural Transformation in China (with Amartya Lahiri and Viktoria Hnatkovska)