Access to High-Income Countries and Product Innovation : Evidence from China

In this paper, I study the effect of access to markets in high-income countries on firms' product innovation in developing countries. To do so, I exploit a reform that exogenously increased market access for firms in the world's largest developing country, China. Applying an instrumental variables strategy to rich firm-level administrative data, I show that exporting to high-income countries leads firms to innovate new products. These gains were driven primarily by privately-owned firms. My estimates show that a ten percentage point increase in market access to richer countries caused a 1.8 percentage point increase in product innovation for privately-owned firms. These effects are induced by the increase in revenue produced by exporting to high-income countries