We find that U.S. export restrictions weaken the innovation incentives of U.S. firms that supply sanctioned foreign entities. Export restrictions prompt targeted foreign entities to accelerate their innovation efforts, ostensibly with increased support from their governments—including weakening enforcement of U.S. intellectual property rights (IPR). Weaker IPR reduces U.S. suppliers’ ability to appropriate returns from R&D, leading to an 11% decline in R&D expenditures and a 17% reduction in R&D-related hiring. Post-sanctions, U.S. suppliers adjust their IP protection strategy: patent filings (which require detailed disclosure) decline by 22%, while mentions of trade secrets in regulatory filings rise by 41%. These effects are stronger when sanctioned entities are likely to reverse-engineer their suppliers’ technology and weaker when domestic competition necessitates U.S. firms to innovate. The impact is most pronounced in patent-intensive industries and for suppliers who hold patents in sanctioned countries. Finally, R&D employees who leave exposed suppliers experience adverse labor market outcomes. Our findings suggest that export controls may unintentionally fuel foreign innovation and IP appropriation, prompting U.S. firms to scale back innovation and favor secrecy over patenting.