Export competition and innovation

How does the rise of China affect innovation in other countries? I emphasize the importance of export competition, which means competition in third countries, in answering this question for two reasons. First, since Chinese exports have grown worldwide, firms in other countries compete against China not only in their domestic market but also in their export markets. Second, since innovation is skewed toward exporters, competition in export markets could have innovation consequences. Exploiting South Korean patent data using a novel firm-level measure of export competition, I find that (i) export competition with China increases Korean firms’ innovation, (ii) this response is driven particularly by high-productivity firms, and (iii) increased innovation is associated with product quality improvement. These findings are rationalized by a multi-country model of endogenous innovation incorporating consumers with quality preferences and firms with heterogeneous productivity.