College Expansion, Trade and Innovation: Evidence from China

China has expanded the yearly quota on newly admitted college students by more than 7 times since 1999. How did this massive college expansion affect firms’ export and innovation choices? I document that after this expansion impacted the labor market, Chinese manufacturing firms’ innovation strongly increased, especially among exporting firms, accompanied with sizable skill upgrading of China’s exports. Guided by these facts, I develop a two-country multi-industry spatial equilibrium model, featuring skill intensity differences across industries and heterogeneous firms’ innovation and export choices. Using firm-level data over time, I empirically validate the model predictions by exploiting differential supply shocks of college-educated workers across regions. Quantitatively, I find that the college expansion explained 72% of increases in China’s manufacturing R&D intensity between 2003–2018 and also triggered export skill upgrading. Without trade openness, the impact of this education policy change on China’s innovation and production would have declined by 10–20%