A new study from Georgia Tech’s School of Economics highlights how export competition between two countries in a third-party market is an overlooked driver of innovation — a timely finding as tariffs and trade wars commence in the United States, the world’s largest consumer market.
The paper, published by Assistant Professor Manho Kang in the European Economic Review, offers a new way for researchers, regulators, and policymakers to measure export competition and its impacts, so they can make more informed decisions on how trade policies may affect the economy.
“Competition in export markets matters for firm behavior,” Kang said. “People tend to only consider a single market, and it tends to be the domestic market. But competition happens all over the world.”
Findings and Impact
Kang found that when China increased exports into South Korea, it did not drive innovation among South Korean firms. However, when Chinese increased exports to shared third-party markets, South Korean patent applications and product quality both grew in response.
The work helps clear up some previously mixed evidence on how competition from China affects innovation in domestic markets. By considering both domestic and export markets in his research, Kang shows how the export competition was a much larger factor than domestic for Korean firms’ innovation.
“This suggests that the ambiguity in the existing literature may stem from overlooking the role of export competition,” he said.
Kang’s new way to measure export competition can be applied to any factor policymakers are interested in, providing more insight into how their decisions may affect the economy.
For example, although export competition results in better-quality products for consumers, it comes at a price.
Only the most productive (typically, largest) firms in South Korea were able to innovate in response to Chinese competitors, especially if they were already market leaders and sought to protect their market share. However, less productive (smaller) South Korean firms found it hard to keep up and were more likely to exit the market.
“So that heterogeneity or unequal consequences is also a key part of my paper,” Kang said. “Innovation increases overall, but if you zoom in, then there is an unequal feature that you can see based on firm size.”
Why it Matters
Most previous studies on competition come from the United States and focus on its domestic market. But for many countries such as South Korea, Japan, and other East Asian and European nations, export markets are significantly larger than their domestic markets. So, how competition drives innovation via export markets is more important, especially with the current upheaval.
“Tariffs and the level of export competition in the United States change every day, and that is one of the reasons why so many leaders try to negotiate with the U.S. government to get a better deal,” Kang said.
“Not only because the U.S. market is large and they want to sell their products, but because the intensity of competition with other countries in the U.S. market changes as a result of the deal.”
“Export Competition and Innovation” was published in the European Economic Review in September 2025. Read more at: https://doi.org/10.1016/j.euroecorev.2025.105059
