Pushed to perform: Chinese competition made Western companies more innovative

Extensive new research sheds light on how China's rise has driven innovation and evolution in Europe and the U.S., largely to the benefit of Western firms

The rise of China’s manufacturing sector is one of the most remarkable changes in global business this century. In 2020, Chinese exports of trade goods to the United States alone amounted to about $435B, a staggering increase from 1985 levels, when imports from China were about $4B. As China’s penetration into Western markets has grown, so too has Western wage inequality and unemployment in many parts of the U.S. 

Although much political and social rhetoric over the last decade has blamed the rise in Chinese imports for much of the negative labor impacts in the West, the general consensus among researchers has been that technology, and not trade, caused the biggest industry disruptions, wage inequality, and job losses. 

The volume of U.S. imports of trade goods from China from 1985 to 2020, in billion U.S. dollars. (Source: Statista)

New research, however, by Nicholas Bloom (Stanford), Stephen Terry (Boston University), John Van Reenen (LSE), and Paul Romer (NYU) suggests that this consensus may be wrong for three critical reasons:

1. Most of the analysis of China’s impact used data only up to the mid-1990s, which largely predates the rise of China.

2. The impact of trade through offshoring rather than end-goods has not been assessed.

3. The impact that low-cost goods had on Western innovation has also not been defined.

To better understand China’s real impact, Bloom et al. looked at a decade’s worth of innovation, economic, and productivity data from across Europe. The analysis is extensive, including employment, capital, materials, wage bills, and sales information from almost every firm on the Continent. In addition, they also analyzed the rise in R&D and IT spend across the top 20 European markets as Chinese imports grew.