Impact of Inward FDI, Import on Domestic Innovation: Evidence from China

Hastened by triangle trade patterns, exchange of immediate goods and inward foreign direct investment have become the main channels to achieve technical spillover. Based on regional inward capital data and classified traded goods, we examine causes of innovation in the context of inward foreign direct investment. We find that local absorptive capacity critically affects creative power. Economies transfer techniques using various approaches, impacting local innovation in diversity. A low degree of industrial-correlation hampers knowledge spillage through foreign direct investment in high-tech industries. Existing technology stocks satisfy technical wants for imported parts rather than imported capital goods. This makes it difficult to digest or absorb spillovers from the latter. China benefits substantially from technical spillovers of imported parts mostly from Asian economies. Governments should support research and develop machinery and equipment industries to accumulate know-how. China should proportionately import parts from European countries and USA to realize trade balance and reduce trade conflicts.