The Impact of FDI on Domestic Firm Innovation: Evidence from Foreign Investment Deregulation in China

Yan-000529044 Liu and Xuan Wang

No 9672, Policy Research Working Paper Series from The World Bank

Abstract: This paper studies the impact of foreign direct investment on domestic firms’ innovation in China. It provides causal evidence by exploiting China’s foreign direct investment deregulation in 2002 and employs a difference-in-difference estimation strategy. Using a matched firm-patent data set from 1998 to 2007, the results show that the quantity and quality of domestic firms’ innovation benefit from foreign direct investment. Moreover, the paper emphasizes the importance of knowledge spillover from foreign direct investment in similar technology domains. The analysis examines the role of horizontal foreign direct investment and foreign direct investment in technologically close industries—industries that share similar technology domains. The findings show that foreign direct investment in technologically close industries generates much bigger positive spillovers than horizontal foreign direct investment. The paper also shows that knowledge spillover from foreign direct investment in similar technology domains is not driven by input-out linkages. Moreover, the spillover effect is stronger in cities with higher human capital stock and firms with higher absorptive capacity.

Keywords: General Manufacturing; Textiles; Apparel&Leather Industry; Business Cycles and Stabilization Policies; Pulp&Paper Industry; Construction Industry; Plastics&Rubber Industry; Common Carriers Industry; Food&Beverage Industry; Intellectual Property Rights; Legal Products; Common Property Resource Development; Social Policy; Regulatory Regimes; Legal Reform; Judicial System Reform; Legislation; Real&Intellectual Property Law; Trade Law; Foreign Trade Promotion and Regulation; Investment and Investment Climate; International Trade and Trade Rules (search for similar items in EconPapers)
Date: 2021-05-24
New Economics Papers: this item is included in nep-cna, nep-cse, nep-fdg, nep-int and nep-sbm
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Citations: View citations in EconPapers (1)

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