Did Chinese import competition lower American innovativeness?

by on March 21, 2017 at 12:55 am in Data Source, Economics | Permalink

The central finding of our regression analysis is that firms whose industries were exposed to a greater surge of Chinese import competition from 1991 to 2007 experienced a significant decline in their patent output. A one standard deviation larger increase in import penetration decreased a firm’s patent output by 15 percentage points. Using data from the 1975 to 1991 period and a regression setup that accounts for the diverging secular innovation trends in computers and chemical, we confirm that firms in China-exposed industries did not already have a weaker patent growth prior to the arrival of the competing imports.

…The innovation activity of US firms did not merely shift from the US to other countries. We estimate similar negative effects of import competition on patents by US firms’ domestic employees and by their foreign employees. Instead, our results are most consistent with the notion that the rapid and large increase in competition squeezed firms’ profitability and forced them to downsize along many margins, including innovation. Consistent with that interpretation, we find that the adverse impact of import competition on patent output was concentrated in firms that were already initially more indebted and less profitable.

That is from David Autor, David Dorn, Gordon Hanson, Gary P. Pisano, Pian Shu, with much more at the link.

1 steveslr March 21, 2017 at 12:59 am

With Autor’s work on the effects of product imports, there’s always a mirror image question left unasked about the effects of labor imports.

For example, it would be interesting to figure out how much more innovative California agriculture would have been without cheap labor immigration.

Judging from this crops-rotting-in-the-fields lament, it sounds like a lot of low-hanging fruit got left on the tree:

http://www.latimes.com/projects/la-fi-farms-immigration/#nt=oft12aH-1la1

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2 The Anti-Gnostic March 21, 2017 at 7:48 am

Labor is DIFFERENT you silly non-economist. That’s why all prices should gently rise, except the price for labor, which should always fall.

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3 N.K Anton March 21, 2017 at 9:44 am

Don’t think it’s so much innovation, but using or adapting them that high wages tend to help with.

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4 Anonymous March 21, 2017 at 11:26 am

Some of that automation developed by state schools and federal departments.

Most recently, drones

https://www.universityofcalifornia.edu/news/drones-aid-agriculture

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5 Sam March 21, 2017 at 11:54 am

That article sounds great, they’re transitioning farms to something cleaner, more productive, and switching from swanky wine-grapes to almonds. Huzzah!

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6 Troll me March 21, 2017 at 1:06 am

It’s also consistent with newly industrializing countries having expanded production in old industries (e.g., not smartphones) where there wouldn’t be a lot of new patents anyways, or where the reduced patents due to dollar store competitors does not represent a loss of innovation that has much long-term relevant to productivity.

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7 Ray Lopez March 21, 2017 at 1:22 am

Yes, but look at the other side of the coin: it’s also consistent with the view that if you’re a patentee faced by a bunch of Chinese knock-offs, you can sue in…where? Sue the importer? Fly-by-night. Sue in the ITC? That’s expensive, you need high priced DC lawyers. Sue who? You’re out of luck. By contrast, if you’re a patentee facing an American infringer, you can easily pick up the phone, threaten a patent lawsuit, and after a bit of back and forth you both settle out of court (the typical pattern) agreeing amongst yourselves to divide up the market in a mutually beneficial manner, perhaps with the infringer taking out a token license to save face. That’s the typical American way.

I think this study is significant. If I can boil it down to a soundbite that any American can understand, it’s this: Chinese knock-offs hurt American innovators and it’s hard to find a remedy. It’s hard to sue an importer. They pop up and go out of business like Whack-A-Mole®

Offtopic bonus trivia: I’m winning or drawing almost every game I play against my PC, even in “grandmaster mode”. Must be some settings I have mistakenly turned off, like think on your opponents time? Nope, not that. Maybe the 10,000 Hour Rule by Malcom Gladwell? Perhaps, but I think I have more than 10k hours. What is it? I’ve become a chess freak, I should start playing in tournaments. Geezus, am I as good a player as TC? I should challenge him to a correspondence game. Or maybe it’s like the inverse of Curry’s shooting slump, I’m just on a roll, that’s more likely.

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8 JCS March 21, 2017 at 1:29 am

To add to your boiled down soundbite:

If the stuff you invent gets knocked off by China before you can make any money, inventing things becomes a bad investment.

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9 Ray Lopez March 21, 2017 at 1:35 am

@JCS- yes, I like that soundbite. Also I think some DC lawyer who deals with the ITC might take objection with my post, by saying it’s so easy to sue an importer, but my experience on the West Coast (I’m not a lawyer) is that it’s not as trivial as one might think, the infringers are rather hard to pin down, and unless you’re a savvy multinational it might be tough collecting a whole lot, after your lawyer fees.

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10 Alain March 21, 2017 at 1:58 am

How about this shorter version: patents don’t afford any protection against firms from China, given that publishing ones methods is retarded.

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11 Ray Lopez March 21, 2017 at 1:31 pm

Yes, I like that one too. For that reason method patents are actually mostly not favored in practice, (it’s harder to prove you are infringing a method, without inside the factory information which is hard to come by if the factory is in China); product patent claims are more favored, all things being equal.

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12 Troll me March 21, 2017 at 3:28 am

All of what you say is relevant. And I think this is the expected reaction.

But the point is that so is what I said. And I don’t think it’s so much included in the expected reaction, which is why I said it.

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13 Jan March 21, 2017 at 5:37 am

Violating anti-trust laws is the American way?

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14 Hazel Meade March 21, 2017 at 9:54 am

If you watched the latest Portlandia, consumers are already onto this. See the ‘Instant garbage’ opening.
“We found the exact price point at which the hassle of returning the product outweighs the price you paid for it.”

I think everyone has been burned by cheap chinese knock-offs by now. That’s why EBay and Amazon allow you to filter for North American points of origin.
If they keep this up they will have a permanent reputation for producing crap. You only trust a Chinese supplier if it is owned by Apple or some other large international mega-corporation.

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15 So Much For Subtlety March 21, 2017 at 5:04 am

To my surprise I think I agree with Nathan. How much innovation is there in the world of plastic buckets?

Yes, the Chinese are moving up the food chain in terms of sophistication but they are basically still in the world of dumb mass production. This is Joseph Schumpeter’s world. The Chinese move into making things Americans used to make but with cheaper labor. They do not need to innovate in a scientific sense because those technologies are old. The gales of creative destruction are blowing through America. The old industries are dying. They would be dying without the Chinese.

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16 Hazel Meade March 21, 2017 at 10:02 am

Agreed.
The industries that are actually threatened by Chinese competition are mostly those that produce dumb things where not much can go wrong in production. Plastic buckets. Their attempts to knock off high tech products are generally crap. Lots of US companys run manufacturing facilities in China, but they are run by Americans. They are not home-grown Chinese industries, and probably will never be without some radical change in Chinese policies. Essentially the home-grown Chinese tech industries suffer from much of the same problems that the old Soviet tech industries suffered from – an insanely high defect rate due to an anti-competitive business environment caused by the structural inefficiencies of the centralized state. By now we’re pretty well aware of the levels of corruption and inefficiency in China’s state-run industries, so I don’t see their attempts to make cell-phones being much more successful.

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17 Lord Action March 21, 2017 at 10:11 am

How much of the Chinese problem is that the same factors that prevent American firms from working with that market (no IP enforcement, culture of theft and dishonesty, can’t trust a contract) prevent quality Chinese firms from developing?

The prevailing narrative is that Japan made the transition from making junk to making globally competitive manufactured products. Is there really a cultural difference between Japan and China that will persist, or did Japan have to solve these problems too so maybe we can expect China to solve them?

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18 Hazel Meade March 21, 2017 at 11:13 am

The problem is that China is still an autocratic centrally managed place, and Chinese state-owned industries have the fingers of corrupt politicians all over them. Japan is a competitive free market.

19 Lord Action March 21, 2017 at 12:51 pm

For an autocracy, China seems to have a large number of WROL problems to go with their EROL problems.

I really don’t know how Japan was economically organized in 1943, but I imagine the war swept all that away. Clean starts can be nice.

20 Harun March 21, 2017 at 3:57 pm

“Lots of US companys run manufacturing facilities in China, but they are run by Americans. They are not home-grown Chinese industries, and probably will never be without some radical change in Chinese policies.”

No offense, but are you actually involved with China in any way?

Because most production is outsourced to Chinese owned firms.

The American invested factories often produce for the Chinese domestic market.

But perhaps you could point me to Apple’s factory in China? no…owned and operated by Foxconn.

How about Nike? oops, owned and operated by Pou Chen group.

Also, if you look at plastic buckets, they are often still made in the USA because they are easily automated.

Sterilite is sold in Walmart, BTW.

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21 Troll me March 21, 2017 at 5:09 pm

I think the misunderstanding is that the design is generally American in these cases, and people basically know that.

But perhaps do not know that the industrial engineering to actually make a bunch of units is often done over there, unless you’re talking really cutting edge stuff.

I think most people would correctly guess that day-to-day management is run by Chinese.

But contrary to what you say, I think it’s very relevant to recognize the value that experienced management can bring through various partnerships (etc.). This was completely understood and openly recognized as recently as 10 years ago, and was an openly stated major reason for Chinese firms having an interest in partnerships and to attract talent (often paying very large premiums for those with upper management experience, but not necessarily execs from international firms, say). It was also a major reason for much focus towards the study of international management and trading practices to be applied within Chinese organizations.

22 TMC March 21, 2017 at 8:33 am

I agree with Nathan too. There is a selection bias in the industries in which the Chinese choose to compete with the US. It is not in favor of the innovative industries.

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23 Harun March 21, 2017 at 4:03 pm

They compete in almost every industry.

Seems a little too large an economy to just blithely claim they make cheap trinkets so its no big deal.

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24 Troll me March 21, 2017 at 5:27 pm

Your point will become increasingly relevant in time.

But in the interest of having well-informed preferences on the part of the public, the argument as presented is not sufficiently informative in either facts or perspective.

It’s hugely relevant. Because the fact that “the jobs they “took” were mostly going to be lost anyways” (or not) is probably one of the largest objects of potential debate that could significantly tilt the debate, on a subject with potential to, on its own, lead into a situation of proliferating trade barriers and protectionism – which would with virtual certainty be negative for consumers and workers of almost all economies.

Is a 25% China tax fair because they stole all the technologies? Or did they pick up the crumbs of old technologies and deliver 2 decades of low priced goos to American consumers, helping to keep inflation down while the US remained competitive in the most high tech and cutting edge sectors?

Both sides (and other sides) of the story are important.

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25 Brett March 21, 2017 at 1:09 am

Innovation doesn’t have to be produced entirely in-house. IIRC The pharmaceutical industry moved to effectively outsourcing R&D to smaller, more focused firms and start-ups.

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26 JCS March 21, 2017 at 1:31 am

Well it’s in-house *somewhere*, just not at the big pharma firms.

Also there’s an argument to be made that increasing generic competition made pharmas more averse to internal development at some margin, though I don’t typically think of China as a big generic producer.

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27 AC March 21, 2017 at 10:31 am

And how’s that been going for them, eh?

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28 WH March 21, 2017 at 3:26 am

Hmm lacking any explanatory model, checking for other countries (what happened in UK, EU etc) and checking for other variables i’d just add this to the list of http://www.tylervigen.com/spurious-correlations and park it as an example of people finding what they want to find.

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29 MP March 21, 2017 at 4:36 am

I’m too lazy to read the whole thing, but how do they racist the direction of causation? Seems just as plausible (or more) that industries that innovation less would be more vulnerable to import competition.

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30 MP March 21, 2017 at 1:38 pm

“racist”? Not exactly sure what that was before autocorrect, but I meant something like “determine”!

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31 bjdubbs March 21, 2017 at 4:43 am

If the Chinese manufactured a new 1995 Honda Civic for $10000, I would probably be willing to forego more than 20 years of auto industry “innovation.”

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32 So Much For Subtlety March 21, 2017 at 5:15 am

Actually the consuming public seems to disagree:

https://en.wikipedia.org/wiki/Tata_Nano

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33 B. Reynolds March 21, 2017 at 8:11 am

He said a Honda Civic, not a go-kart.

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34 Axa March 21, 2017 at 8:35 am

If you bought a Civic for 10K back in 1995, that’s approx 16K 2017 dollars. The 2017 Civic starts at 18K, the difference should account for airbags and electronic stability systems.

So, don’t mistake “innovation” for price inflation. https://www.bls.gov/data/inflation_calculator.htm

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35 SPENCER March 21, 2017 at 12:05 pm

This is what the CPI does. It measures the cost of a 19xx vintage car.

Make 19xx any base year you want.

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36 john March 21, 2017 at 5:27 am

Should we question if patent applications & issuance is a correct measure of innovation? Perhaps the patents are not sought because a) it is a cost, b) it makes the information public for anyone to see and learn and c) may not be providing the protections assumed. Once might think that just keeping one’s innovations as secret as possible forcing competitors to do their work to reverse engineer or discover on their own should increase with increased violation of patent rights. There are more margins of adjustment then merely not innovating.

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37 Anonymous March 21, 2017 at 5:48 am

The innovation activity of US firms did not merely shift from the US to other countries. We estimate similar negative effects of import competition on patents by US firms’ domestic employees and by their foreign employees. Instead, our results are most consistent with the notion that the rapid and large increase in competition squeezed firms’ profitability and forced them to downsize along many margins, including innovation. Consistent with that interpretation, we find that the adverse impact of import competition on patent output was concentrated in firms that were already initially more indebted and less profitable.

A lot of things are going on at once, but this can be viewed (like the reduction in good blue collar jobs) as a price of efficient production and competition, lower margins worldwide.

It is the Ryan Event thing again.

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38 Anonymous March 21, 2017 at 5:52 am

Pfft. I have to watch that autocorrect more closely. Ryan Avent:

http://marginalrevolution.com/marginalrevolution/2017/03/saturday-assorted-links-103.html

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39 Matt March 21, 2017 at 6:14 am

Industries that are easy to outsource will see a drop in labor price, and have less incentive to innovate labor saving technologies. The flip side is that you would expect an increase in innovation with an increase in the minimum wage, as industries come up with new ways to squeeze the most productivity out of their newly expensive workers. Does Tyler have a term for an argument with a mood-affiliation opposite the one in the political discourse?

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40 rayward March 21, 2017 at 6:56 am

Those who look in the rear view mirror will see what’s behind them. Globalization and trade is moving into a new phase, one defined not by the shifting of production to developing countries such as China but by competition from goods made not for American firms by China firms but by China firms for China firms. You want disruption, well, disruption lies just ahead: the liberal world order is about to be turned on its head. The TPP was intended to address the new phase (by expanding opportunities for American firms in countries beyond China), but it’s dead. Meanwhile, China is solidifying its relations with its neighbors to the south, building high speed rail to connect China and the countries that could have been tomorrow’s competition, and expanding its dominance in the South China Sea and the all-important sea lanes to the open Pacific. Trump may be ignorant of what’s behind us (since he doesn’t read books), but his own history, one devoted to demonizing the competition not besting it, provides all the insight one needs to see his approach to the coming disruption. And American business, having prospered greatly from the liberal world order, now sees the competition in the new phase of globalization and trade, and like rats abandoning a sinking ship, has joined Trump and girds for the disruption and conflict that lies ahead.

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41 ¯\_(ツ)_/¯ March 21, 2017 at 7:11 am

Don’t worry, have the pineapple curry.

More seriously, we are a hugely wealthy nation. We have the option to provide good curries to everyone (as a cash benefit for the needy) and to rebuild our social fabric.

It is just difficult in the short term, as populist politics injures individuals and society. A wave of anti-solutions. An anti-pattern.

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42 MattW March 21, 2017 at 7:44 am

Would US firms be more innovative if they didn’t have access to a global market? If you can sell the same product to 100 million more people there’s no need to innovate. If your market remains more or less the same you need to come up with a new product to keep revenue/profits rising.

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43 Troll me March 21, 2017 at 5:32 pm

A very strong damper on the logic.

The sorts of measures that would lead to increased demand for automation research (namely, trade barriers that would lead to jobs coming home to relatively more expensive US workers) are not conducive to easy access to the international market.

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44 mb March 21, 2017 at 8:20 am

I did not see that they controlled for students returning. I know from the time I received my BS to the time I received my MS, foreign students went from staying (probably close 100%) to seriously considering returning to returning about 50%. Anecdotal, but visas were severely constrained during that period. It would be interesting to see if native patents remained steady, or if they declined as well.

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45 Mike Linksvayer March 21, 2017 at 9:34 am

I’ve not read the Autor paper yet, but am curious after recently reading https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2927147 mentioned in http://marginalrevolution.com/marginalrevolution/2017/03/friday-assorted-links-104.html which seems to make opposite case (intercity competition leads to bigger firms which have resources to/are forced to innovate to compete).

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46 Zach March 21, 2017 at 1:39 pm

So industries that had a sharp profitability shock decreased investment? Makes sense.

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47 JWatts March 21, 2017 at 2:09 pm

Agreed. This research seems to confirm the expected results of intense price pressure. When you have to cut your prices, you have to cut spending. Spending on R&D is, at some point, going to be reduced in such a scenario.

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48 William Dorrington Fisher March 22, 2017 at 12:47 pm

I find that these results would be accurate. It only makes sense that once larger amounts of imports were being recorded that innovativeness would decline. Why would one try to come up with new ideas and, new ways of doing things when we are receiving everything from foreign countries. Additionally, it make sense that when a firm or company is spending more on imports it would have to decrease their spending in other areas.
Which leads me to believe that patents would be the best option to cut spending on. Why would a company spend money on new innovations and patents with no guarantee of making a profit. Especially if that company was already in financial trouble, they would devote more money to the things they knew they could make money on just to try and stay afloat. This leads me to think that the increased imports are not only lowering innovativeness itself, but is discouraging the thought of becoming innovative as well.

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49 Jackson Layers March 22, 2017 at 3:10 pm

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50 Dallas Weaver Ph.D. March 22, 2017 at 4:03 pm

Import competition, or even competition for discretionary dollars with new sectors, can make a sector of the economy into a declining sector, For example, tropical fish faced both import competition and the loss of the kids with 10 fish tanks in their bedroom, who shifted to video games and computers.

A declining sector (which I operated in) faces a different situation when it comes to patents than an expanding sector. Creating an innovation often costs less than patenting and defending the innovation and being a declining sector you have a declining market for your invention. Under these conditions, keeping your innovation proprietary becomes the optimal course as you can use it to your business advantage. As a consequence of this situation, I didn’t patent any of my innovations in the production of ornamental fish. I did license, with a handshake deal, some of the innovations to equipment manufacturers.

The point being that in a declining sector, patenting doesn’t make economic sense relative to proprietary innovation. The above article results on innovation may just be a measurement artifact and really not indicate a real innovation decrease.

PS: I have had a multi-decade long contest between myself and a very innovative professor friend who patented everything and had to defend his patents, about which approach was better. He has higher royalties and charges 15% vs my 5% handshake license, but his legal fees are huge. To defend his patents, his house now has a huge loan (he won, but he lost and only the lawyers really won).

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