Premium
Can Innovation Help U.S. Manufacturing Firms Escape Import Competition from China?
Author(s) -
HOMBERT JOHAN,
MATRAY ADRIEN
Publication year - 2018
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12691
Subject(s) - profitability index , china , quartile , monetary economics , endogeneity , competition (biology) , stock (firearms) , business , economics , econometrics , finance , medicine , mechanical engineering , confidence interval , ecology , political science , law , biology , engineering
ABSTRACT We study whether R&D‐intensive firms are more resilient to trade shocks. We correct for the endogeneity of R&D using tax‐induced changes to R&D costs. While rising imports from China lead to slower sales growth and lower profitability, these effects are significantly smaller for firms with a larger stock of R&D (about half when moving from the bottom quartile to the top quartile of R&D). We provide evidence that this effect is explained by R&D allowing firms to increase product differentiation. As a result, while firms in import‐competing industries cut capital expenditures and employment, R&D‐intensive firms downsize considerably less.