Revisiting the role of trade liberalization in technological innovation: Evidence from free trade zones in China

This paper examines the causal relationship between trade liberalization and technological innovation using the case of China’s Free Trade Zones (FTZs). Based on the natural experiment of the staggered establishment of FTZs across China, we apply a DID-based causal inference framework and estimate a significant positive treatment effect on the scale and quality of urban technological innovation. This result is supported by a range of estimators and robustness checks. We show that knowledge flows measured by technology transfer and collaborative innovation and institutional optimization measured by strengthened intellectual property protection and relaxed market entry barriers significantly drive post-FTZ growth in urban technological innovation performance. Moreover, the depth of reform rather than the number of zones established or the level of government attention to science and technology explains the heterogeneity in innovation performance across FTZ cities. We also reveal the pivotal role of FTZs in promoting both leading-edge technological innovations and breakthroughs in new technological domains. This study provides new empirical evidence on the relationship between trade liberalization and technological innovation and highlights the importance of trade liberalization reforms for developing countries.