Abstract
This paper investigates how import competition affects U.S. manufacturing firms’ incentives to innovate. I conjecture that U.S. firms view import competition from high-wage countries (HWCs) as a neck-to-neck competition and intensify their efforts to innovate. By using the import competition faced by other OECD countries as an instrument variable, I find that U.S. firms increase their investments in R&D and receive more citations for their patents when faced with import competition from HWCs. On the other hand, import competition from LWCs does not have any impact on U.S. firms’ incentives to innovate.