How Does Firm R&amp;D Respond to Trade Shocks? Evidence From <scp>UK</scp> Manufacturers

ABSTRACT This article uses matched UK administrative data to examine the impact of trade shocks on R&amp;D investments of UK manufacturing firms from 2002 to 2011. We pay particular attention to the controversial effect of Chinese import competition on firm innovation. Our analysis provides strong evidence that the rise in imports from China, following its accession to the World Trade Organization in 2001, led to a significant decrease in R&amp;D spending among UK firms. Importantly, we find considerable heterogeneity in this effect based on firm size: Chinese competition was particularly detrimental to the R&amp;D of small firms, while its impact on large firms was not statistically significant. We also document the positive role of export market size in stimulating firm R&amp;D, indicating that booming export demand during this period helped to somewhat offset the adverse effects of Chinese competition.