Rules of Origin, Import of Inputs and Firm Innovation

Abstract

This paper investigates the impact of CAFTA rules of origin (RoO) on Chinese firms’ import of inputs and innovation behaviors. The findings indicate that the implementation of CAFTA RoO increases Chinese firms’ intra-regional imports, thereby promoting their innovation activities through the “cost effect”. This impact is more pronounced among foreign-owned firms and those with lower participation in processing trade. Furthermore, labor-intensive firms' import decisions are more sensitive to CAFTA RoO, while capital-intensive firms experience greater innovation gains from the rise in intra-regional imports.