Does exporting to China spur firm innovation activities in developing countries?

Abstract

Trading with developed countries has been shown to promote technological progress. However, it remains unclear whether trade between developing countries promotes or hinders technological progress. To address this gap, the present study utilizes micro data from the 2006–2021 World Bank Enterprise Surveys for 139 developing countries to assess the link between exports to China and innovation activities. We analyze the relationship between exports to China and various proxies for firm-level innovation activities in other developing countries. Our findings suggest that exports to China significantly enhance innovation in other developing countries, regardless of the innovation measures used. The heterogeneous analysis shows that the effects are more pronounced for mature firms and exporters, while young firms and non-exporters are more likely to introduce process innovation directly, rather than spending more on R&D. This effect becomes more pronounced after the implementation of China's Belt and Road Initiative in 2013. The underlying mechanism is that exporting to China (only for capital-intensive goods) could increase the demand for skilled labor, thereby contributing to higher innovation activities among firms in developing countries, as evidenced by firms hiring a greater proportion of skilled labor. These labor adjustments could contribute to the increase in the likelihood of firms introducing process innovation and spending on R&D by 38% and 47%, respectively.