Outward Foreign Direct Investment, Multidimensional Distance, and Firm Innovation: Evidence From China

Jiajia Zhang and Lang Wu

Review of Development Economics, 2026, vol. 30, issue 1, 470-483

Abstract: The impact of outward foreign direct investment (OFDI) on firm innovation is examined empirically, using data of Chinese listed companies from 1999 to 2020. The results show that OFDI contributes positively to the innovation performance of firms. Cultural distance negatively moderates the impact of OFDI on firm innovation, and the relationship between OFDI and firm innovation is negatively contingent on institutional distance. Besides, the potential mechanisms of absorptive capacity and industrial competition are examined. Moreover, the effect of OFDI on firm innovation is stronger when firms are private and large when firms adopt the entry mode of M&A, and when firms invest in host countries with high R&D intensity. The findings have policy implications by offering novel evidence and new insights into the innovation‐enhancing effect of OFDI in the context of emerging economies.

Date: 2026
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