Proximity to the Frontier, Markups, and the Response of Innovation to Foreign Competition: Evidence from Matched Production-Innovation Surveys in Chile

Abstract

This paper employs a matched firm production-innovation panel dataset from Chile to explore the response of firm innovation to the increased competition arising from the China shock. The data cover a wider range of innovation inputs and outputs than previously possible and allow generating measures of markups and efficiency (TFPQ) that correspond closely to the concepts of rents and technological leadership envisaged in the Schumpeterian literature. Except for the 10 percent most productive plants that see an increase in quality, increased competition depresses most measures of innovation. These differences are exacerbated when interacted with plant-level movements in rents. (JEL D24, L25, L60, O14, O19, O31, O34)