From “Point” to “Chain”: Technology Cutoffs, Firm Innovation and Supply Chain Spillover
JIANG Ruixue, JIANG Li, LIU Hongkui, LIU Canlei
Institute of New Structure Industry Development, Business School, Shandong Normal University; School of Economics, Renmin University of China; Institute of Economics, Chinese Academy of Social Sciences; School of Economics, University of International Business and Economics
Summary:
The blockade and cutoff of core technologies have become a defining feature of the intensifying rivalry among major economies. Since it first sanctioned ZTE in 2018, the United States has progressively escalated its export controls against China, shifting from sanctions on individual firms toward a comprehensive encirclement of critical-technology supply chains. The representative instrument in this shift is the Entity List administered by the U.S. Bureau of Industry and Security (BIS). By the end of 2024, nearly one thousand Chinese entities had been listed, marking a shift in U.S. export controls from targeted restrictions to a de facto technology cutoff. Given rising risks of decoupling and supply-chain fragmentation, understanding how technology cutoffs affect Chinese firms' efforts to extend and strengthen domestic supply chains through innovation, and revealing the mechanisms through which supply-chain spillovers operate under external shocks,are of both theoretical and practical importance, particularly for China's pursuit of high-level science-and-technology self-reliance. In this paper, we address two questions. First, does a technology cutoff strengthen or weaken the innovation of the firms it directly targets? Second, and more importantly, does the innovation response of targeted firms spill over through supply-chain linkages and promote innovation among their downstream firms? From a theoretical perspective, technology cutoffs may generate two opposing effects. On the one hand, the loss of access to key technologies and critical components may weaken firms' R&D capabilities and production efficiency, thereby constraining innovation investment and output (the constraint effect). On the other hand, external restrictions may induce firms to accelerate indigenous innovation, search for alternative technologies, and pursue technological breakthroughs (the forcing effect). Existing studies have not reached a consensus regarding which effect dominates. More importantly, little micro-level evidence is available on whether technology cutoffs generate cross-firm innovation spillovers through supply-chain relationships, particularly positive spillovers driven by firms' indigenous innovation. We take the Entity List as a quasi-natural experiment and study a panel of Chinese A-share listed firms from 2016 to 2022. To ensure clean identification, downstream firms are defined by sales relationships established before 2018,so that the supply-chain structure is predetermined with respect to the technology cutoff, thereby avoiding endogeneity arising from changes in buyer-supplier relationships after the shock. We focus on downstream rather than upstream firms because, in critical-technology sectors, a targeted firm's upstream suppliers are often included on the Entity List, making upstream spillovers difficult to identify cleanly, whereas downstream transmission provides a clearer empirical setting. The main findings are as follows. First, technology cutoffs significantly increase innovation by targeted firms, and the positive effect is concentrated in the technological fields directly affected by the cutoff, reflecting both the forcing effect and firms' efforts to strengthen domestic supply chains through indigenous innovation. Second, technology cutoffs generate positive supply-chain spillovers: innovation output increases significantly among downstream firms connected to targeted firms. Third, innovation spillovers are transmitted through three channels: market leadership, technology transfer, and knowledge sharing, thereby enhancing the innovation capability of downstream firms. Heterogeneity analysis shows that these downstream spillover effects are stronger when targeted firms receive greater government subsidies, are certified high-tech enterprises, possess higher technological autonomy, or maintain more stable supply-chain relationships. The contributions of this paper are threefold. First, it shifts the focus from the “point” to the “chain”, showing that technology cutoffs not only induce indigenous innovation of targeted firms, but also generate positive spillovers to connected firms. This provides empirical evidence supporting China's strategy of strengthening and extending domestic supply chains to achieve technological self-reliance. Second, whereas previous supply-chain studies have primarily emphasized the negative contagion effects of shocks such as firm failures, natural disasters, and cyberattacks, this paper identifies a positive externality transmitted through innovation, thereby enriching the literature on supply-chain resilience. Third, while existing studies primarily examine backward innovation spillovers from downstream customers to upstream suppliers, this paper documents forward spillovers originating from strategically positioned targeted firms and identifies three empirically testable mechanisms. Overall, the findings provide useful policy implications for promoting collaborative innovation across different stages of the supply chain, facilitating the diffusion of innovation outcomes, and designing targeted innovation policies for different types of firms.
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