We analyze the impact of rising import competition from China on U.S. innovative activities.
Using Compustat data, we find that import competition induces R&D expenditures to be
reallocated towards more productive and more profitable firms within each industry. Such
reallocation effect has the potential to offset the average drop in firm-level R&D identified in
the previous literature. Indeed, our quantitative analysis shows no adverse impact of import
competition on aggregate R&D expenditures. Taking the analysis beyond manufacturing, we
find that import competition has led to reallocation of researchers towards booming service
industries, including business and repairs, personal services, and financial services.