Does Import Competition Reduce Domestic Innovation? Evidence from the 'China Stock' and Firm-Level Data on Canadian Manufacturing

Myeongwan Kim ()

No 2019-03, CSLS Research Reports from Centre for the Study of Living Standards

Abstract: A key economic issue in Canada is the declining Business Enterprise Research and Development in manufacturing since the early 2000s. Accompanying this, the total factor productivity (TFP) growth in manufacturing slowed after 2000. However, there has not been a definitive explanation for these trends. To deepen our understanding of this phenomenon, we focus on the increasing Chinese import share in the total domestic absorption in Canadian manufacturing since the early 2000s, which appears to be driven by positive supply shocks within Chinese manufacturing. Based on a firm-level database covering all incorporated firms in Canadian manufacturing, we find that rising Chinese import competition led to declines in R&D expenditure and TFP growth within firms but reallocated employment towards more productive firms and induced less productive firms to exit. The negative within-effects were pronounced for firms that were initially smaller, less profitable, and less productive. These firms also experienced declines in their profit margins due to rising Chinese import competition while larger and better-performing firms did not. Our estimates imply that rising Chinese import competition can explain about 7 per cent of the total decline of $1.36 billion (2007 CAD) in R&D expenditure in Canadian manufacturing between 2005 and 2010. Although it led to declines in TFP within firms, the positive reallocation effects more than offset the negative within-effect. Had there been no increase in Chinese import competition between 2005 and 2010, TFP in Canadian manufacturing would have declined by 1.26 per cent per year instead of the actual 1.09 per cent per year over this period.

Keywords: China Shock; Canada; Imports; Productivity; Innovation (search for similar items in EconPapers)
JEL-codes: F62 L60 O32 O51 O53 (search for similar items in EconPapers)
Date: 2019-08
New Economics Papers: this item is included in nep-bec, nep-cna, nep-com, nep-cse, nep-eff, nep-sbm and nep-tid
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