Effects of China's Manufacturing Exports on Firm Innovation in the US

Based on the market segmentation theory, this paper employed data on ChinaUS trade and firm R&D, innovation and TFP to investigate the long-term effects of China’s manufacturing exports on firm innovation in the US from an heterogeneity perspective, and tested the underlying mechanism. The authors found that in the long run, China’s manufacturing exports had to some extent increased manufacturing firm innovation in the US. The effect is highly heterogeneous across various manufacturing sectors. While Chinese exports affect the innovation output of non-core manufacturing firms in the US, they did little on the innovation of core manufacturing firms in the US. In the long run, the cumulative R&D input of core manufacturing firms in the US has not decreased significantly, and factors of production had migrated from non-core to core manufacturing sectors. Such a reallocation of production factors has increased specialization and overall innovation output from US manufacturing firms. By demonstrating that the rise of developing countries is consistent with the theory of comparative advantages, this paper refutes the "China threat" narrative touted by some developed countries, and provides scientific basis for rational resource allocation and international division of labor.