Trade Policy Uncertainty and Innovation: Evidence from China’s WTO Accession

This study proposes a novel channel through which trade liberalization may induce innovationthrough the reduction of trade policy uncertainties (TPU) in destination markets. To verify thislinkage, we utilize the significant reduction of TPU engendered by China’s accession to theWorld Trade Organization (WTO) in 2001 as a quasi-natural experiment. Wefind that reduc-tion in TPU significantly encouragesfirms’patent application:firms in sectors with a larger re-duction in uncertaintyfiled more invention patent applications after China’s WTO accession.We alsofind thatfirms’innovation responses to TPU reduction vary by productivity, owner-ship, exporting status, and the irreversibility of investment.