Proximity to the Frontier, Markups, and the Response of Innovation to Foreign Competition: Evidence from Matched Production-Innovation Surveys in Chile

This paper employs a matched firm production -innovation panel dataset from Chile to explore the response of firm innovation to the increased competition arising from the China shock. The data cover a wider range of innovation inputs and outputs than previously possi-ble and allow generating measures of markups and efficiency (TFPQ) that correspond closely to the concepts of rents and technological leadership envisaged in the Schumpeterian literature. Except for the 10 percent most productive plants that see an increase in quality, increased competition depresses most measures of innovation. These differences are exacerbated when interacted with plant-level move-ments in rents.

Automated summary

This study utilizes a matched firm production-innovation panel dataset from Chile to investigate the impact of increased competition due to the China shock on firm innovation. The data provides a broader range of innovation inputs and outputs, allowing for the generation of measures of markups and efficiency (TFPQ) that closely correspond to the concepts of rents and technological leadership in the Schumpeterian literature. The findings reveal that, except for the top 10 percent most productive plants, increased competition suppresses most measures of innovation. These differences are further magnified when considering plant-level movements in rents.