Does Import Competition Spur Firms’ Innovation Behaviour: Evidence from Indian Manufacturing

The scholarship concerning linkages between innovation, productivity, and trade has been widely studied, yet the literature concerning developing countries like India is unsettled. In India, the trade liberalization episode provides an interesting context for empirically estimating the causal impact of trade openness and its subsequent effects on competition and productivity growth through innovation. The existing studies use different data sources, and methodologies for calculating total factor productivity (TPF), for example, single and double deflation approaches and translated into contradictory outcomes. Moreover, the rich literature under this umbrella has only used nominal tariffs as an inverse measure of foreign/import competition to capture the relationship between trade liberalization, innovation, and competition and a few have used effective rates of protection (ERP). In addition, there is a lot more focus on TFP with lesser analysis of possible channels for instance an increase in competition leading to productivity growth. As theoretical literature espouses, the transition from trade shocks to productivity growth could not be possible without innovation. Thus, in the present study, we analysed the impact of ERP on innovation (research and development (R&D) expenditure). By employing panel data estimation techniques, particularly dynamic panel models and panel quantile regression, this study finds a positive relationship between innovation and competition, i.e. the negative relationship between different measures of tariff and R&D expenditure of a firm.