China Shock or Spark? The Effects of Chinese Trade Exposure on Innovation in Latin America & Sub-Saharan Africa

Abstract

Due to the varied extensive effects of the China Shock throughout developing countries attempting to adjust to new competition and trade dynamics, it is unclear whether the Shock sparked or depressed innovation activity at the firm level. I use a combined dataset of 20,769 firms throughout Latin America and Sub-Saharan Africa from 2005-2016 and exploit cross-industry and cross-country variation of Chinese trade exposure to determine the effects of both increased import and export exposure on firm-level innovation activity. The analysis reveals that Latin American firms see small positive yet significant increases in innovation as a response to increased Chinese import exposure, representing incremental innovation. The inclusion of an instrument variable suggests that of the two channels of import exposure, increased import competition and increased input imports, the reaction is primarily procompetitive, but the distinct effects are not evident due to deficiencies in the model. Aside from this, Sub-Saharan Africa displays few small negative responses to increased Chinese import exposure, but overall stagnant innovation levels, and Chinese export exposure shows no considerable evidence of an impact on innovation activity. These results coincide with other literature regarding the specific relationship between China and developing countries and also abide by theories of innovation.