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Ms. Linyi Zhang
Ph.D. Candidate in Managerial Economics and Strategy
Kellogg School of Management
Northwestern University

This paper examines the impact of competition from Chinese imports on innovation by U.S. public manufacturing firms. Exploiting cross-industry and over-time trade variations from 1991 to 2004, I find that when Chinese imports surged into the U.S. market, U.S. public manufacturing firms increased their number of patents as a response. In addition, U.S. public manufacturing firms appeared to adopt horizontal differentiation as a strategy to escape Chinese competition; they were more likely to patent in new technology classes and to enter new product markets. I also document differential responses to Chinese import competition across firms. While large firms were responsible for the increase in patents and horizontal differentiation, small firms significantly reduced their R&D expenditures and were more likely to exit. Finally, I provide novel evidence on the channel of adjustment: new inventors to the firms were responsible for almost all of the increased innovation. When Chinese import penetration intensified, inventors were more likely to leave small firms and go to large firms.

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