Balancing export intensity and innovation: Uncovering the inverted-U relationship in Chinese manufacturing firms

Understanding the trade-innovation relationship is crucial for assessing how exporting firms in developing countries adapt to global markets. This paper examines how export intensity (EXI) influences innovation using data from 854,925 Chinese manufacturing firms (1998–2014). We identify two opposing forces: a learning effect, where knowledge spillovers facilitate technology adoption and skill upgrading, and a capture effect, where competition from advanced firms constrains innovation. Using human capital and technology gaps as moderators, we find that at low EXI levels, firms with higher human capital benefit more from knowledge diffusion, boosting innovation. However, as EXI exceeds 50 %, the capture effect dominates, limiting innovation. Our findings reveal an inverted-U relationship between EXI and innovation, highlighting the need for firms to strategically manage export intensity to maximize learning while mitigating competitive pressures.