Where to Go: Trade Protectionism or Open Competition? Evidence from Micro-enterprise Innovation

Li Wenjing; Zheng Manni

doi:doi:10.16538/j.cnki.jfe.2018.03.002

Summary

A series of populism activities, such as the Swiss referendum, the Greek debt referendum, and the Brexit vote, have been taken place in European since 2013, which means that European civilians fight against the elite’s suppression. In 2016, Trump was elected as the new president of United States, which also means his populism, exclusion ideas and trade protection ideas were supported by voters. In the context of global anti-integration and trade protectionism, what road could Chinese enterprises choose to develop? In 2016, at the G20 Summit in Hangzhou, President Xi Jinping called for pushing for opening up, breaking trade barriers and building a more dynamic world economy. Only by participating in the global trade and trade competition with an open mind can we deepen our cooperation and seek win-win results. Now China’s economy has entered into a new normal of slowing GDP growth, showing an ‘L’-shape growth. In the face of the economy downward pressure and the ‘post-crisis era’ of the world economy, Xi Jinping has pointed out that the key solution depends on innovation. President Xi Jinping also called at the G20 summit to build an open world economy and continue to promote the liberalization of trade and investment. So, the discussion about the impacts of trade liberalization and trade competition on enterprise innovation can answer the question about how to choose the option between trade protection and open competition, and find ways to promote the innovation of Chinese enterprises, which has important policy implication and practical significance. The literature of trade liberalization and enterprise innovation is very abundant. Many foreign studies focus on how external shocks like foreign trade reform affect total factor productivity（TFP）and product upgrading in developing countries（Amiti and Khandelwal, 2013; Anh et al., 2011; Topalova and Khandelwal, 2011）. However, the huge differences in political systems and the use of different indicators to measure enterprise innovation lead to the inconsistent conclusions. Domestic researches examine the impact of import penetration, intermediate tariffs and trade barriers on corporate TFP or R&D investment. They consider that the escape competition effect of trade liberalization encourage local enterprises to innovate（Jian et al., 2014）, and international interaction, namely entry and exit, enable exporters to gain important new knowledge through the ‘learning-by-exporting effect’ and innovative benefits in imitation（Tian and Yu, 2014; Yu, 2010）. Most domestic literature uses TFP to measure enterprise innovation, but there is a bias in TFP in imperfectly competitive markets（Aghion et al., 2005）. Moreover, the researches on the competitive effect of trade liberalization lack further investigation into the moderating role of competitive effect. On account of these, this paper attempts to analyze and examine the impacts of trade protection and open competition on enterprise innovation from a perspective of enterprise patent application, which has important theoretical and academic significance. In 2001, China formally acceded to the WTO and began to fulfill its obligation of reducing tariffs as a member state. Tariff reduction weakens import barriers, promotes trade liberalization, increases import penetration and brings more foreign competition to the domestic market（Bloom et al., 2016; Lu and Yu, 2015）, thus affecting the innovation of domestic enterprises. Most existing literature studying on the relationship between market competition and innovation uses patents to measure innovation（Aghion et al., 2005; Hashmi, 2013）. On account of this, this paper takes tariff reduction after China’s accession to WTO as an entry point, and uses the data of Chinese manufacturing tariffs from 2001 to 2008, as well as the patent data of listed companies in A-share market, to test that how import competition affects enterprise innovation. This paper finds that when tariff reduces, enterprise invention patent applications increase significantly, but total number of patent applications and non-invention patent applications do not increase significantly. Import competition encourages enterprises to carry out high-quality invention. In addition, import competition encourages stimulated higher-quality inventions of enterprises which are more vulnerable to competition（e.g. non-state-owned enterprises and enterprises with high-degree industrial competition）and have high total factor productivity. The technological level is the moderating effect of the encouragement of import competition to enterprise innovation. This paper may has several contributions as following: firstly, unlike market competition metrics measured by endogenous imports or corporate financial data（Bloom et al., 2016; Zhang et al., 2014）, we use quasi-natural experiment of tariff reduction after WTO to examine the effect of import competition from the perspective of micro-enterprise innovation, which can effectively alleviate the endogeneity problem and enhance conclusion credibility; secondly, combining the background of the economic system in the transition period of China, we study the impact of import competition on Chinese enterprise innovation, which can be a useful supplement to the study of trade liberalization and enterprise innovation in emerging market countries and developing countries; to further examine the moderating effect of import competition helps us to clarify the reasons for the effect of market environment on the micro-enterprise behavior; thirdly, it subdivides import competition from market competition, which provides extra support for most of the current literature that only focuses on market competition and innovation; fourthly, the use of patents to measure innovation is consistent with foreign literature of market competition and innovation, and can better define innovation motivation and quality of innovation（Tong et al., 2014）, and also solve the problem of using TFP that may have biases in imperfect competition market.