Foreign Divestment – Crisis or Chance for China’s Innovation Edge?
The recent move towards decoupling from China, prompted by the 2018 trade war, has implications for the innovativeness of Chinese firms. Using patent data from the Chinese State Intellectual Property Office, together with comprehensive firm-level data, applying an inverse propensity score re-weighting methodology to deal with selection bias, we estimate changes in the patenting activity of firms following ownership transition to Chinese owners, linking these changes to the differential taxation incentives offered to foreign investors. Far from crippling innovation, divestment has sparked an increase in patenting and other innovation measures. We suggest that this can be explained by an effort by the new Chinese owners to reduce their tax burden.