(iPoster) American ICT Sector Innovation after the Korea–US Free Trade Agreement

• In Event: Poster Session: New Directions in International Political Economy

Abstract

When trade liberalization reduces market competition, do firms tend to innovate more or less? Existing studies have focused on the opposite side of the question: the effects on innovation when liberalization increases market competition. Moreover, the literature often underplays the role of firms’ political influence in shaping post-liberalization market competition. We argue that, in industries where market access and resources are mediated through the government, liberalization enables politically influential firms to reduce competition, increasing their incentives to rent-seek instead of innovate.

We isolate the innovation effects of reduced competition by studying the 2007 Korea-US Free Trade Agreement (FTA)’s effect on the American Information and Communications Technology (ICT) sector. The FTA, by reducing tariffs and procurement barriers, actually reduced competition from Korean firms in one of the few industries where American firms had previously faced significant Korean competition, reducing competition for American ICT firms more than other sectors. Using a synthetic control design, we test whether the FTA affected the number of patent filings in the American ICT sector compared to sectors where foreign competition was not affected. We conduct this test at two different stages: the signing of the FTA and the implementation of the FTA. We find that the signing of the FTA reduced patent filings in the American ICT sector while the implementation did not, which provides evidence that expectations of trade liberalization, when it reduces market competition, can be harmful to innovation.

Author

• Unregistered Participant