Innovation responses of Japanese firms to Chinese import competition

• Published date: 01 January 2020
• DOI: http://doi.org/10.1111/twec.12843
• Author: Nobuaki Yamashita,Isamu Yamauchi
• Date: 01 January 2020

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:60–80.

© 2019 John Wiley & Sons Ltd

Received: 10 October 2017

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Revised: 15 January 2019

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Accepted: 15 June 2019

DOI: 10.1111/twec.12843

ORIGINAL ARTICLE

Innovation responses of Japanese firms to Chinese

import competition

NobuakiYamashita1,2

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IsamuYamauchi3,4

1School of Economics, Finance and Marketing,Royal Melbourne Institute of Technology (RMIT) University, Melbourne,

Vic, Australia

2Centre for International Economics,Keio University, Tokyo, Japan

3School of Information and Communication,Meiji University, Tokyo, Japan

4Research Institute of Economy, Trade and Industry (RIETI), Tokyo, Japan

Funding information

Zengin Foundation for Studies on Economics and Finance

KEYWORDS

China, import competition, innovation, Japan, patents, R&D

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INTRODUCTION

In 2010, China overtook Germany to become the world's largest manufacturing exporter, increas-

ing its share of global exports to almost 10% from about 3% in 1999—a monumental event which

exerted tremendous competitive pressures on the world economy. Substantial evidence now sug-

gests that exposure to Chinese import competition has adverse effects on wider dimensions of

domestic manufacturing activities in developed countries, including survival rates of manufacturing

plants (Bernard, Jensen, & Schott, 2006), large contractions in manufacturing employment (Pierce &

Schott, 2016), depressed wages and employment prospects for people in occupations with skills easily

replaced by imports of Chinese goods (Autor, Dorn, & Hanson, 2013; Autor, Dorn, Hanson, & Song,

This study is conducted as a part of the project “Mobility of Knowledge and Innovation Performance” undertaken at the

Research Institute of Economy, Trade and Industry (RIETI). This study utilises the micro data of the questionnaire informa-

tion based on “the Basic Survey of Japanese Business Structure and Activities” which is conducted by the Ministry of

Economy, Trade and Industry (METI), and the Kikatsu Oyako converter, which is provided by RIETI. For useful suggestions

and comments, we would like to thank anonymous three referees of this journal as well as Andrew B. Bernard, Byeongwoo

Kang, Russell Thomson, Chandra Athukorala, Trevor Kollmann, Alberto Posso, Kozo Kiyota, Kazuyuki Motohashi, Sadao

Nagaoka, Yuqing Xing and seminar participants at the 2016 Empirical Investigation in Trade and Investment (EITI), the

Institute of Developing Economies, Deakin University, Keio University, Kyoto University, Kyushu University, ANU,

Research Institute of Economy, Trade and Industry (RIETI), UN‐ESCAP, the 2016 East Asian Economic Association

conference and the 2016 Asia Pacific Innovation Conference (APIC). A portion of this research was undertaken while

Yamashita was visiting the Institute of Economic Research at Hitotsubashi University in Tokyo. He thanks Ryo Kambayashi

and Yuki Matsuzaki for their hospitability during his stay.

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YAMASHITA And YAMAUCHI

2015; Ebenstein, Harrison, McMillan, & Phillips, 2014; Ebenstein et al., 2014; Hummels, Jorgensen,

Munch, & Xiang, 2014). However, the effect of import competition from China on innovation has so

far received comparably sparse attention. This is surprising because the studies cited above also sug-

gest that import competition from China can foster skill‐biased technological change (Utar & Torres

Ruiz, 2013), resulting in corresponding productivity growth in firms and industries that are more

exposed to Chinese import competition (Mion & Zhu, 2013).

Available studies also offer mixed evidence on the effects of Chinese import competition on innova-

tion. Collecting data for a large sample of European firms, Bloom, Draca, and Reenen (2016) find that

innovating firms have proactively responded to the intensified Chinese import competition by increasing

their range of innovative activities, including patenting, research and development (R&D) expenditures,

computer usage, and TFP growth. Their findings are consistent with predictions from the “trapped” factor

model of production (e.g., firm‐specific skilled workers) wherein the trapped factors are redeployed to

contribute more innovation when being exposed to import competition from low‐wage countries (Bloom,

Romer, Terry, & Reenen, 2013).1 Contradictory evidence is found in Autor, Dorn, Hanson, Pisano, and

Shu (2017) where it is stated that Chinese import competition leads not only to a decline in patenting and

R&D by US firms but also the sales, profitability, stock market valuation, employment and capital in the

more affected industries. It is argued that this stark difference in responses of innovation between the US

and Europe is attributed to a difference in the degree of competition in the two product markets through

the lens of theoretical treatment in Aghion, Bloom, Blundell, Griffith, and Howitt (2005).

In the light of the divergent empirical findings between US and European samples, we examined

innovation responses of Japanese firms to the increased competition from Chinese imports.2 We built

a comprehensive firm‐level dataset, merging firm‐level accounting information with patent statistics

drawn from the Institute of Intellectual Property (IIP) Patent Database (Goto & Motohashi, 2007).3

The data were complemented by an index measuring firms' exposure to the intensity of cross‐industry

Chinese import competition. We estimated change in innovation responses (measured by patents and

R&D) to change in the degree of import competition from China at the industry level for the period

1995–2005. Japan provides an interesting point of reference as it shares some of the key features of the

US and European countries: the Japanese labour market structure is known for its rigidity, like its

European counterparts,4 but Japan shows a technological prowess comparable to the US, which is re-

flected in the patenting specialisations (Kwon, Lee, & Lee, 2017).

1 In the literature, this is known as the “defensive skill‐biased innovation” hypothesis, first discussed in Wood (1995) and

subsequently theorised in Thoenig and Verdier (2003). It postulates the defensive response of firms in developed countries by

upgrading their technologies when they are exposed to low‐cost import competitions. Bloom et al. (2013) advance this

research stream by introducing the “trapped” factors of production in the dynamic general equilibrium model of trade and

growth. Because of the presence of trapped factors, when firms are exposed to low‐wage import competition, the opportunity

costs of the trapped factors, that were previously used to produce old technology products relatively decline (see the relevant

case studies in Bloom et al. (2016)). Firms exposed to import competition utilise the trapped factors by making products with

updated technologies because of firm‐specific skills. This eventually leads to more innovation. Bloom et al. (2016) empiri-

cally verify this for European firms.

2 We mainly focus on “domestic innovation” because our measure of innovation covers patents that are applied by the

residents (i.e., firms) in the Japan Patent Office (JPO).

3 The data matching procedure undertook is similar to the NBER project (matching Compustat and US patent data). Our work

is the first attempt to create a matched firm‐patent dataset for Japanese firms. We describe the name matching procedure in

Section 4. Our dataset covers both unlisted and listed companies, whereas Compustat in the US, based on the NBER project,

only covers listed companies.

4 The lifetime employment and the seniority payment are often cited as the contributing factors to the rigidity of the Japanese

labour market.