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

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  • JOHAN HOMBERT
  • ADRIEN MATRAY

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.

Suggested Citation

  • Johan Hombert & Adrien Matray, 2018. "Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?," Journal of Finance, American Finance Association, vol. 73(5), pages 2003-2039, October.
    • Handle: RePEc:bla:jfinan:v:73:y:2018:i:5:p:2003-2039
    DOI: 10.1111/jofi.12691
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