Competition from China is often viewed as a challenge for European manufacturers. But new research suggests it also encouraged firms to innovate, invest in R&D and develop more sophisticated products.

When Chinese imports surged into global markets during the 2000s, many European manufacturers faced intense competitive pressure. The impact of this so-called “China shock” has been widely documented, with research linking it to factory closures, job losses and significant disruption in labour markets. ¹

But there is another, more positive side to the story.

Research by Balázs Muraközy, conducted with colleagues from the European Commission’s Joint Research Centre and the European Investment Bank, suggests that stronger competition from Chinese imports did not simply force European firms to cut costs. In many cases, it encouraged them to innovate, and to innovate in more sophisticated ways.

Their study, Import Competition from China, Escape Competition, and the Shift toward Science-Based Innovation, explores how European manufacturers responded to rising import competition between 2000 and 2020, and what this tells us about the relationship between competition, innovation and long-term competitiveness.

Does competition stimulate innovation?

Economic theory offers two competing perspectives. One suggests that firms may try to “escape competition” by innovating more aggressively to stay ahead of their lower-cost competition. The other argues that stronger competition may reduce profits and leave businesses with fewer resources and incentives to invest in innovation.²

Empirical evidence has been mixed. Studies in the United States have found that Chinese import competition reduced investment in research and development and patent activity. European firms, however, appear to have taken a different path.³

Looking beyond patents and R&D spending

Much of the existing research measures innovation through traditional indicators such as R&D expenditure or patents. Balázs’ work takes a broader view and uncovers more nuanced findings.

Using data from the Community Innovation Survey, which gathers information directly from thousands of firms across Europe, his research examines whether organisations introduced new products, improved production processes, adopted new management practices and what types of resources they used during the innovation process. The survey also captures how firms innovate, including whether they collaborate with universities and research institutions.

This matters because many businesses, particularly small and medium-sized firms, innovate without formal R&D departments or applying for patents. Traditional measures can therefore overlook a significant amount of business innovation.

By looking more closely at how firms innovate, the research provides a richer picture of how businesses actually respond when competitive pressure increases.

Innovation to escape competition

The findings support the idea that European firms often seek to counter Chinese competition through innovation, particularly focussing in technological upgrading to differentiate their products.

Manufacturing industries that experienced greater exposure to Chinese imports saw larger increases in the proportion of firms introducing new products and production processes. In contrast, there was little evidence that competitive pressure drove increases in organisational or marketing innovation.

The research also reveals an important shift in how firms pursued innovation.

Companies exposed to stronger import competition were more likely to carry out R&D, invest more heavily in research activities and collaborate with universities and research organisations. Rather than relying primarily on the adoption of existing technologies, they increasingly developed the scientific and technical capabilities needed to create more sophisticated products.

What does this mean for business leaders and policy makers?

The findings highlight a valuable lesson for organisations operating in highly competitive markets and at a time when industrial policy has returned to the forefront of European economic policy.

Policies that facilitate access to research funding, highly skilled workers, and collaboration between firms and universities can play an important role in helping firms respond to stronger international competition.  Strengthening these capabilities can support a competitive and innovative manufacturing base in Europe.

At the same time, the study highlights a difficult policy trade-off. While protecting domestic industries from low-cost imports may preserve jobs in the short term, doing so could weaken incentives for businesses to innovate and upgrade their products. Balancing these competing objectives remains one of the central challenges facing industrial and trade policy today.

As governments and businesses continue to respond to growing international competition, the evidence suggests that innovation remains one of the most effective routes to resilience and sustainable growth.

¹ D. H., Dorn, D., & Hanson, G. H. (2016). The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade.

² Aghion, P. (2026). Nobel Lecture: The Economics of Creative Destruction

³ Shu, P. & Steinwender, C. (2019). The Impact of Trade Liberalization on Firm Productivity and Innovation