Historical Trade Liberalization and Modern Innovation: Evidence From China's Treaty Ports

Abstract

ABSTRACT Does trade liberalization exert a long‐lasting influence on innovation? To answer this question, we exploit a unique historical setting: China's forced market opening through the treaty port system from 1842 to 1943, combined with comprehensive firm‐level innovation data from recent decades. Using a spatial comparison framework, we show that firms located in historical treaty port regions continue to exhibit stronger innovation performance than those in other regions, even after controlling for pre‐existing regional differences. This finding remains robust to extensive checks addressing contemporary trade liberalization, firm characteristics, historical agglomeration, alternative innovation measures and endogeneity concerns related to treaty‐port selection and firm sorting. Our findings underscore the importance of historical path dependence in shaping contemporary innovation outcomes and suggest that the legacy of early trade liberalization, such as the accumulation of foreign investment and human capital, offers a compelling explanation for persistent regional disparities in innovative activity.