Innovation and the International Economy

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Swissotel Chicago, Zurich A
Hosted By: American Economic Association
  • Chair: Daniel Trefler, University of Toronto

Market Size and Innovation in China

Daniel Trefler
,
University of Toronto
Miaojie Yu
,
China Center for Economic Research and Peking University

Abstract

To understand the current and future impacts of Chinese competition on OECD firms one must understand the trajectory of quality improvements among Chinese exporters. Rising quality has been documented by Brandt and Thun (2010), Manova and Zhang (2012), Brandt et. al (2012) and Sutton and Trefler (2016). What has been the source of this upgrading? While considerable attention recently has been devoted to improved access to foreign intermediate inputs (e.g., Brandt et. al, 2012; De Loecker et. al, 2016), we investigate a channel that is known to be important in many other contexts, namely, the size of the firm’s market. By ‘market’ we mean combined domestic and foreign markets.

As shown by Acemoglu and Linn (2004) in a domestic context and Lileeva and Trefler (2010) in an international trade context, an increase in the size of the market available to a firm leads the firm to invest in innovation. We conjecture that these market-size effects are precisely what drive innovation in China. To investigate, we use Chinese firm-level data matched with R&D data, patent data, international transactions data and domestic highway data to examine whether China’s rising quality can be explained by rising rates of innovation and whether rising rates of innovation can be explained by growth in the domestic Chinese market (as measured by highways) and by improved access to foreign markets (as measured by foreign demand and by foreign tariffs against China). Our initial work strongly suggests that both domestic and foreign market size matter and that the latter is the more important of the two.

Throughout, we emphasize allow for the possibility that investments in innovation (the ‘treatment’) have heterogeneous impacts on innovation (‘the outcome’). We thus control throughout for observed and unobserved firm heterogeneity.

Innovation and Trade: Evidence From French Firm-Level Data

Philippe Aghion
,
College of France
Antonin Bergeaud
,
Bank of France
Matthieu Lequien
,
ENSAE-ENSAI
Marc Melitz
,
Harvard University

Abstract

Innovative firms have better export performance, both within export destinations as well as across export markets. Does this correlation reflect a causal effect of exports on innovation, or the effect of innovation on exports, or both? How does the innovation behavior of a firm react to its export markets’ conditions? Is there a spillover effect of trade on innovation whereby, when a firm starts exporting into a country, the scope for subsequent innovations by other firms operating in that country increases? This paper is a first attempt at understanding these firm-level patterns connecting innovation and trade using matched data from three main sources: patents and citations, balance sheet, and customs.<br /><br /><br />
<br /><br /><br />
To disentangle the direction of causality between innovation and export performance, we construct a firm-level export demand shock. This variable responds to aggregate conditions in a firm’s export destinations but is exogenous to firm-level decisions (including the concurrent decisions for export- market participation). Our (preliminary) results show that firms strongly respond to these export demand shocks with higher rates of innovation (measured as an increase in the stock of patents).<br /><br /><br />
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Second, we explore the existence of trade spillovers on innovation by other firms. Following the entry of a French firm into a new export market, there is an increase in the flow of new patents building on that firm’s previous patents by inventors/firms located in that export market destination. Hence, trade appears to foster the diffusion of knowledge and consequently the flow of innovations by other firms operating in the same export destination.<br /><br /><br />
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Third, we study in further detail the causal pattern from successful innovation to export market performance. To do this, we link the quality of a firm’s innovation to its subsequent export performance, focusing in particular on the firm’s choice of future export market participation.

Notching R&D Investment With Corporate Income Tax Cuts in China

Zhao Chen
,
Fudan University
Zhikuo Liu
,
Shanghai University of Finance and Economics
Juan Carlos Suarez Serrato
,
Duke University
Daniel Yi Xi
,
Duke University

Abstract

Governments around the world encourage R&D investment based on the belief that economic growth is highly dependent on innovation. This paper analyzes the effects of a large fiscal incentive for R&D investment using a novel link between administrative and survey data of Chinese firms. The fiscal incentive is part of the InnoCom program, which awards a lower average corporate income tax rate to qualifying firms. The program generates a notch, or jump, in after-tax firm values since qualifying firms are required to maintain their ratio of R&D-to-sales above a given threshold. This sharp incentive varies over time and across firm characteristics. We exploit this policy variation to implement a cross-sectional “bunching” estimator that is novel in the R&D literature, to analyze potential evasion responses, and to estimate the effects of R&D on productivity. We find that this program led a large number of firms to locate at the qualifying R&D intensity threshold. We find that a substantial fraction of this response is due to tax evasion, and that accounting for evasion is crucial when estimating the effect of R&D on productivity.
Discussant(s)
Marc Melitz
,
Harvard University
JEL Classifications
  • F6 - Economic Impacts of Globalization