Import penetration from China and Innovation in OECD Countries

In the OECD countries, especially in the US, a huge increase in imports from low-wage countries was registered after China joined the WTO in 2001, and this shock in the manufacturing industrial industry resulted in the beginning of a tough import competition suffered by US and European companies. In this study, we investigate whether and to what extent, the increased import competition from China has stimulated, or depressed, the inventive activity of advanced countries. Specifically, we analyze imports from China and IPRs (especially patents) in a panel of fifteen OECD countries between years 1995 and 2019. Our results show that imports from China and innovation (measured by patent counts) not only follow the same trend but are also linked by a long-run relationship, also robust to control variables, such as the quality of institutions and the R&D expenditure. Such relationship is still significant and strong when dividing the sample of countries into four different macro regions. Final tests also show a causal relationship between the two variables: in the short run a positive variation in the value of imports from China causes a growth in the number of patents, and the causality is in this direction only, suggesting that the sudden growth in innovation in the early 2000’s was due to an exogeneous shock when China entered the WTO and increased its exports towards the OECD countries. In the long run, the causal relationship is mutual, meaning that imports stimulate innovation, but are also attracted and somehow caused by innovation itself.