U-M Report: Innovation Improves with Import Competition from High-wage Countries

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Companies that face a greater level of import competition from high-wage countries significantly increased their R&D expenditures and generated a greater number of patents, according to new research from the University of Michigan in Ann Arbor.

Yue Maggie Zhou, a professor of strategy at the U-M Ross School of Business and a co-author of the study, says the type of competition makes a difference in how much firms spend on R&D. She says firms in industries that experienced a greater level of import competition from low-wage countries significantly reduced their R&D expenditures and generated fewer breakthrough patents.

"While trading with low-wage countries has brought tremendous benefits to American consumers, it places significant downward pressure on U.S. firms' profitability," Zhou says.

She says a 10 percent increase in import competition from high-wage countries would increase a company’s R&D expenditures by 7 percent and number of patents by more than 5 percent.

"A lot of people think competition is good for innovation," Zhou says. "Our findings say it depends on what kind of competition firms are facing because it may not necessarily be good for the long-term competitiveness of the economy."

She says competition from low-wage countries is based less on technology but more on natural resources and labor, which does not prompt firms to innovate as much as competition from high-wage countries.

The study, called Does Import Competition Spur Innovations?, is available here.

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