This study empirically analyzes how international trade affects the technological innovation of domestic incumbent firms. While international trade is divided into exports and imports, the research focuses on whether it increases the innovation incentives of local firms or instead reduces the incentives for innovation when competition between imports and domestic products intensifies in the domestic market. According to the literature, it is relatively well established that expansion of export markets promotes innovation activities of domestic firms, but the effects of import competition are shown differently among the analyzed countries. This calls for a specific investigation of the Korean case.

The firm-level intensity of innovation is measured through the number of patent applications per employee, representing that the more patents are applied by a firm, the more innovative it is. Next, this study divides import competition into two country groups: one from developed countries and the other from developing countries. The relationship between the level of import competition for each group and the intensity of innovation activities is then investigated.

The analysis finds that Korean firms' innovation activities are significantly affected by the competition between the two groups. Specifically, the import competition from developing countries is shown to promote domestic innovation, but innovation from developed countries tends to reduce innovation incentives. This result unveils two different motives (i.e., escape-competition incentive and Schumpeterian force) that exist between market competition and innovation and thereby supports Aghion et al. (2005, 2009). In particular, firms that have little technological gap with imports from developing countries, including China, are found to be the most sensitive to competition with developing countries, showing that the escape-competition incentive is working well. In other words, firms are responding to import competition according to market mechanisms in Korea.

The findings have important implications for policy-making. Import competition from developed countries occurs mainly high-tech and high- value-added industries that our economy is aiming for. In these industries, market competition has made it difficult for domestic firms to step up as leaders by weakening their innovation incentives. This implies that appropriate government support is necessary, at least concerning technological innovation. Of course, further research is needed specifically on which supporting policies are the most appropriate. However, at least it would be desirable that the government support should be provided in a way that encourages corporate innovation incentives without distorting competition in the market.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Relationship Between International Trade and Innovation Activities
　Section 1 Review of Related Literature
　Section 2 Current Status of Trade and Innovation Activities in Korea

Chapter 3 Data Construction and Variable Definitions
　Section 1 Data Construction for Measuring Innovation Activities
　Section 2 Definition of Variables for Innovation Activities and Import Competition

Chapter 4 Empirical Analysis
　Section 1 Sample Selection and Descriptive Statistics
　Section 2 Econometric Analysis

Chapter 5 Conclusion and Policy Implications

References
Appendix
ABSTRACT