The Effect of Import Competition on Firm Productivity and Innovation: Does the Distance to Technology Frontier Matter?
| Published date | 01 April 2016 |
| Date | 01 April 2016 |
| DOI | http://doi.org/10.1111/obes.12110 |
| Author | Puyang Sun,Wei Jiang,Sai Ding |
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Ā©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 78, 2 (2016) 0305ā9049
doi: 10.1111/obes.12110
The Effect of Import Competition on Firm
Productivity and Innovation: Does the Distance to
Technology Frontier Matter?*
Sai Dingā , Puyang Sunā” and Wei Jiangā”
ā Department of Economics, Adam Smith Business School, University of Glasgow, Gilbert
Scott Building , Glasgow, G12 8QQ, UK (e-mail: sai.ding@glasgow.ac.uk)
ā”Department of International Economics and Trade, Nankai University, Tianjin 300071,
China (e-mail: puyangsun@nankai.edu.cn, weijiang923@gmail.com)
Abstract
How does foreign competition affect growth and innovation in China? Using our unique
measures of proximity of Chinese ļ¬rms and industries to the world technology frontier,
we ļ¬nd that despite vast sectoral heterogeneity, Chinese manufacturing industries have
undergone rapid technological upgrading over the period of 2000ā06. The distance to
the world production frontier of ļ¬rms and industries plays an important role in shaping
the nexus between the competition pressure from foreign imports and domestic ļ¬rmsā
growth and innovationbehaviour. Our results support the theoretical predictions of Aghion
et al. (2005, The Quarterly Journal of Economics, pp. 701ā728) that import competition
stimulates the domestic ļ¬rmsā productivity growth and R&D expenditure if ļ¬rms and
their industries are close to the world frontier, but discourages such incentives for laggard
ļ¬rms and industries. The two forces highlighted by the model operate for imports under
the ordinary-trade regime, for collective and private ļ¬rms, and for imports originated
from high-income countries. Our ļ¬ndings are robust after controlling the inļ¬uence of
foreign investment, the reverse causality of regressors and the short-term business cycle
ļ¬uctuations.
I. Introduction
International trade is widely viewed as a major driver for Chinaās remarkable economic
growth since the start of economic reform (see, Song, Storesletten and Zilibotti, 2011;
Knight and Ding, 2012). However, there is no consensus on whether the exposure to
trade openness has stimulated the innovation incentives of domestic ļ¬rms and therefore
enhances their productivity.For instance, China has long been regarded as the world factory
that produces cheap but inferior quality products whereas Chinese ļ¬rms are considered
JEL Classiļ¬cation numbers: F14; L1; D24; O12
*We are grateful for the extremely constructivecomments from two anonymous referees and the journal editor,
Professor John Knight.
198 Bulletin
as fast followers rather than leaders in terms of technology. This seems to be consistent
with the predictions of the traditional HeckscherāOhlin theory that countries which are
abundant in labour ought to produce and export labour-intensive goods such as toys and
apparel. On the other hand, both Rodrik (2006) and Schott (2008) ļ¬nd that Chinaās export
bundle is signiļ¬cantly more sophisticated than its income levelwould dictate, which cannot
be entirely explained by factor endowments. There is also some recent evidence showing
that China is moving up the technological curve in many sophisticated areas (such as the
telecommunication equipment sector) and becoming a new innovation powerhouse with
its share of the worldās high-technology manufacturing spiralled from 8% in 2003 to 24%
in 2012. Such striking trend corresponds well to the paradigm shift of national innovation
policy towards indigenous innovation1with more focus on domestic ļ¬rms since 2005.
In this paper, we explore two interesting but related research questions. First, is there
any technological upgrading of Chinese manufacturing ļ¬rms and industries so that they
are catching up the world technology frontier? Second, has the increased exposure to
foreign competition through imports generated productivity gains and fostered innovation
behaviour within the Chinese manufacturing sector? The latter can be extended to a much
broader research question: how does the import competition affect growth and innovation
in China? The novelty and contribution of our research lie in the following four aspects.
First, despite a growing literature on Chinaās trade pattern, most research focuses on
the impact of exports on Chinese economy or the competition effect of Chinese imports
to other developed and developing countries (see, Bloom, Draca and Van Reenen, 2011;
Jarreau and Poncet, 2012; Iacovone, Rauch and Winters, 2013; Mion and Zhu, 2013;
Bloom et al., 2014).2The important economic and policy implications of imports are thus
largely ignored in the literature. For instance, imports may represent an important channel
of international technology transfer, which can stimulate the development of industrial
technology in related domestic industries through vertical linkage effects. We tend to ļ¬ll
this gap in the literature by focussing on the effect of competition pressure brought by
imports on domestic ļ¬rmsā productivity and innovation behaviour in China.
Second, we distinguish the heterogeneous effects of import competition on ļ¬rmsā pro-
ductivity growth according to their distance to the world technology frontier. We hypothe-
size that tough foreign competition may induce the productivity improvement of domestic
ļ¬rms which are close to the technology frontier by strengthening their incentives to in-
novate to match the foreign competition; on the contrary, it may reduce ļ¬rmsā incentive
to innovate and therefore their productivity growth if ļ¬rms are further behind the frontier
as their chance to survive the new competition is limited. To the best of our knowledge,
1The indigenous innovation is deļ¬ned as āenhancing original innovationthrough co-innovation and re-innovation
based on the assimilation of imported technologiesāin a State Council document titled by āThe outline plan of medium
and long-term science and technology development 2006ā20ā.
2For instance, Jarreau and Poncet (2012) claim that export sophistication matters for Chinaās growth and the
growth gains from improved technology only link with domestic-owned ļ¬rms and with ordinary trade. Iacovone
et al. (2013) explore the effect of surge in import competition from China on Mexican manufacturing ļ¬rms, and ļ¬nd
that this shock causes a signiļ¬cant market share reallocation within ļ¬rms and between ļ¬rms. Mion and Zhu (2013)
ļ¬nd evidence that import competition from China reduces ļ¬rmsā employment growth and induces substantial skill
upgrading in low-tech manufacturing industries in Belgium. Bloom et al. (2014) develop a ātrapped factorā model
to explain the effect of competition from low-wage imports (such as China) on European ļ¬rms, i.e. rising Chinese
import competition leads to more innovation and resource reallocation towardsmore innovative and technologically
advanced ļ¬rms in Europe, as found in Bloom et al. (2011).
Ā©2015 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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