The Transmission of Sectoral Shocks Across the Innovation Network

We use a firm-level panel of 13 European countries to assess how a sector-specific shock propagates through technological linkages across innovating firms in the rest of the economy. We find that the competition shock to the European textile sector, induced by the 2001 removal of import quotas on Chinese textiles, had a strong negative effect on non-textile firms’ patenting and knowledge sourcing. These firms end up diversifying their patenting across more technological categories and start citing more (geographically and technologically) distant sources of knowledge. When aggregating data at the country level, the negative indirect effect on patenting of non-textile firms can be 3 to 5 times as large as the positive direct effect on textile firms