Innovation through Protection: Does Safeguard Protection Increase Investment in Research and Development?

We perform the first empirical study of the impact of temporary trade protection on firm investment in R&D. Using a firm-level panel of the beneficiaries of safeguard protection between 1975 and 2005, we find support for predictions from the theoretical literature that temporary tariffs stimulate investment in R&D, but we find no evidence that this effect disappears as the termination of protection approaches, as predicted by some models. We also find little evidence that quotas impact firm investment in R&D, which we believe is because of the great deal in variation in how restrictive safeguard-related quota protection has been over the last 35 years.