The Rise of the People’s Republic of China and its Competition Effects on Innovation in Japan

This paper empirically examines the “defensive innovation” hypothesis that firms with higher exposure to low-wage economy import competition intensively undertake more innovative activity by using a high quality Japanese firm-level panel dataset over the period 1994–2005. The novel feature of the analysis is the relation of firm-level variations of patent usage to import competition. The results suggest that intensified import competition from the People’s Republic of China has resulted in greater innovative activity by Japanese firms, consistent with the findings of European firms in Bloom et al. (2016). Moreover, such competition has also led to an increase in non-used patents.