How Does Import Competition Affect Firm Innovation? Evidence and Mechanism

This paper examines the impact of import competition on firm innovation in the Chinese manufacturing sector. We find that import competition stimulates innovation, consistent with the “escape-competition effect” from the existing literature. Firms also adopt more skill-biased technologies in response to increased competition, with this effect observed in both low- and high-tech industries. Moreover, as import competition intensifies, firms expand their range of imported product lines, with this impact being more pronounced for tariff cuts on imports from high-income countries compared to those from non-high-income countries. The importance of product differentiation strategies grows as import competition increases, further driving innovation. We also discover rich heterogeneous effects across firm ownership, firm size, and trade modes. These findings provide important insights for policymakers and scholars on the pro-innovation effects of import competition in developing economies. JEL Classification: F13, F14, O31.