Input Trade Shocks and the Direction of Innovation

We study how imported input price shocks affect both the intensity and direction of innovation. Using comprehensive French firm-level data combining accounting records, ownership structures, customs transactions and patents over the period 2014-2023, we construct firm-level exposure to input price shocks based on structural breaks in product-level import unit values from non-EU countries, aggregated using a shift-share design. Innovation intensity is measured using priority patent applications, while the direction of innovation is characterized by mapping patents to products and embedding them in a production network to distinguish innovations directly related to affected inputs from those connected through upstream, downstream, or technologically adjacent linkages. We find that input price shocks primarily affect the direction rather than the level of innovation. Exposed firms reallocate innovative activity toward connected technological domains, consistent with network-based directed technological change. This reallocation is strongest among firms at the technological frontier, while smaller and less productive firms adjust more through overall innovation intensity. We provide evidence for specific industries, showing that the shock-innovation impact-response is heterogeneous. We interpret our results as firms' resorting to what we label defensive innovation. Our findings can inform policy making and firm strategy in a context of increasing trade fragmentation and geopolitical risk.