This paper contributes to the literature by examining the innovation effects of domestic and foreign competition in an integrated model, with a special emphasis on the moderating effects of ownership and productivity. Using a firm-level production and trade tariff linked panel dataset from 387,725 Chinese firms over the 1998-2007 period and China’s WTO entry as an exogenous paradigm change in openness, the paper finds that the innovation effect of competition is stronger in a more open economic system. The innovation responses of these firms to openness-induced competition differ between the pre- and post-WTO entry periods. The innovation effect of a decrease in sectoral input tariffs became positive and significant post-WTO entry. The paper also finds that market concentration has an inverted U-shaped impact on innovation with an optimal Herfindahl level of 15-25%. Ownership and productivity level of the firms also played a significant moderating role, with high-productivity and private firms post-WTO entry both appearing to have a higher level of optimal competition, and both respond positively to higher levels of foreign competitions induced by input tariff reduction in comparison to their counterparts.

Authors

Xiaolan Fu, Guobing Shen, Yundan Gong, Shuojun Huang