Export Controls and Innovation in Sanctioned Countries

This paper studies how Chinese firms responded to the 2007 U.S. "China Military Catch-All Rule,'' which restricted exports of dual-use products with military applications. By comparing sanctioned goods to those that were just excluded from the policy, we estimate firm-level effects on imports, R&D, and patenting. Treated firms sharply reduced imports of controlled products and increased innovation activity: R&D spending rose by 49.1%, patenting by 41.3%, and the number of active inventors by 30.4%. Patenting in related technologies increased by 65.1% and patents on other topics increased by 41.6%, indicating a broad innovation response rather than one narrowly focused on replacing restricted inputs. We also examine domestic suppliers of controlled goods and find that their innovation increased, but was concentrated in patent applications related to the restricted products, which more than quadrupled. Taken together, these results suggest that a key unintended consequence of export controls is their potential to accelerate innovation in the sanctioned economy.