More Competition, Better Products: Evidence From Tariff Cuts

ABSTRACT This article examines how increased competition affects product and process innovation. I combine plausibly exogenous variation in foreign competition induced by large tariff cuts with a difference‐in‐differences strategy and find that firms increase their product patenting in response to increased foreign competition, but, on average, foreign competition has no effect on process patenting. Firms operating in industries where patents are an effective means of protecting their competitive advantage increase their patenting more in response to competition. Initially large and productive firms engage in more process innovation in response to competitive pressure.