Wednesday 08 October 2025 16:00 - 17:30

SAL 1.04, 1st Floor Conference Room, Sir Arthur Lewis Building, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH

About this event

We examine the implications for innovation of offshoring to China and Mexico. Using 2002-2011 data on 6,024 Canadian firms, including their matched outputs and imports, we regress a firm's change in R\&D expenditures on its change in imports of intermediate inputs from China and Mexico. We instrument for those imports using a novel, model-consistent shift-share instrument whose shocks are changes in the quality of HS6 inputs sourced from China and Mexico. Chinese quality rose rapidly by 200% over this period. The exposure weights are, familiarly, proportional to the firm's HS6 imports. The shift-share IV results are stark. Rising offshoring of intermediates from China and Mexico over 2002-2011 reduced R&D expenditures by 15% as (1) firms who did R&D in 2002 reduced their R&D expenditures and (2) firms who did no R&D in 2002 were discouraged from starting up R&D projects in 2011. Extrapolating out to 2022, R&D decreased by 28%. (These results are confined to non-multinationals -- we find zero effects for multinationals.) We develop a model which rationalizes these unexpected negative results. In it, rising quality of inputs sourced from China takes so much cost out of older generations of products that incentives to develop newer generations are reduced.

Participants are expected to adhere to the CEP Events Code of Conduct.

Directions

This event will take place in SAL 1.04, 1st Floor Conference Room, Sir Arthur Lewis Building, LSE, 32 Lincoln's Inn Fields, London WC2A 3PH.

Trade and Urban Seminars are part of the CEP's Trade programme and Urban programme.