UC Berkeley

Globalization brings opportunities and pressures for domestic firms in emerging markets to innovate and improve their competitive position. Using data on firms in 27 emerging market economies, we estimate the effects of foreign competition, vertical linkages with foreign firms, and international trade on several types of innovation by domestic firms. Using instrumental variables and a battery of checks, we provide robust evidence of a positive relationship between foreign competition and innovation and show that the supply chain of multinational enterprises and international trade are also important channels. There is no evidence for an inverted U relationship between innovation and foreign competition. The relationship between globalization and innovation does not differ across the manufacturing and service sectors.