More Competition, Better Products

This paper examines how increased competition affects product and process innovation. I utilize plausibly exogenous variation in foreign competition induced by large tariff cuts with a difference-in-differences strategy and find that firms increase their product innovation in response to increased foreign competition, but foreign competition has no effect on process innovation. Heterogeneity analysis provides evidence that firms generate more valuable product and process patents when patents are effective in protecting a firm’s competitive advantage. Large firms engage in more process innovation as a response to increased competition.