Worker Reallocation, Firm Innovation, and Chinese Import Competition

While recent work has documented a nexus between international trade and firm innovation, the underlying mechanisms explaining _rms' innovation in response to import competition are thus far poorly understood. To identify such mechanisms and their economic relevance, we use longitudinal linked employer-employee data from Denmark (1995-2012) and conduct analyses at both the firm and worker levels. We first show that import competition triggers a significant increase in innovation. Approximately 40 percent of the innovation effect is attributable to the increase in the share of R&D workers; 14 percent of this increase in the share of R&D workers is due to within-firm worker switching to R&D jobs, while 80 percent is explained by between-firm worker reallocation. Furthermore, we show that having a larger degree of between-firm worker reallocation to R&D jobs relative to within-firm switching is associated with more innovation. The salience of between-firm reallocation is further confirmed by a worker-level analysis, and its importance to innovation is underscored when we extend our analysis to Portugal.