IT liberalization, trade expansion, and firm innovation: Evidence from China

Abstract

Trade liberalization is often a contentious policy for developing countries. This paper investigates how China successfully integrated into global IT production and fostered innovation through trade liberalization under the Information Technology Agreement. Empirical results indicate that the reduction in tariffs on IT products had an asymmetric impact on China's trade, significantly increasing imports of capital and intermediate goods while modestly boosting exports, primarily of consumer goods. Firms in the IT sector, as well as those in upstream and downstream sectors, have increased their R&D intensity following the liberalization of IT products. Further analysis indicates that the growth in R&D intensity stems from high-productivity firms, followed by medium-productivity firms.