2009-18 Innovation through protection

We perform the first empirical study to focus on the relationship between trade protection and investment in R&D. Our results support predictions from the theoretical literature that temporary tariffs stimulate R&D, although we find no evidence that this effect diminishes as the termination of protection approaches as predicted by some theoretical models. We also find little evidence that quotas reduce R&D as predicted by multiple theoretical works. Finally, our results indicate that temporary tariffs result in decreased capital investment, perhaps because firms use periods of temporary protection to shutdown unprofitable facilities. This reveals an important distinction in firm behavior with regard to investment in tangible versus intangible capital during periods of trade protection.