Abstract

This paper examines innovation response of firms with different technology and ownership to domestic and openness-induced competition in emerging transition economies. Using a firm-level panel dataset from China and linked trade tariff data for the period 1998-2010, we find that an inverted-U relationship between domestic competition and innovation regardless of levels of technology and types of ownership although the high-technology and private firms demonstrate greater resilience in innovation. However, their innovation responses to openness-induced competition differ. The decrease of sectoral input tariff significantly stimulates innovation in all types of firms. FDI exhibits the same effect except in the high-technology firms. The decrease of sectoral output tariff promotes innovation in privately-owned and high-technology firms but depresses innovation in the state-owned and low-technology firms. A mixed ownership, ie. increasing state-ownership in privately-owned firms and reducing that in state-owned firms, increases innovation in Chinese firms.