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The impact of foreign direct investment on innovation at domestic firms: Evidence from the deregulation of foreign investment in China

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  • Yan Liu
  • Xuan Wang

Abstract

This paper studies the impact of foreign direct investment (FDI) on innovation by domestic firms in China. A difference‐in‐difference estimation strategy yields causal evidence by exploiting China's deregulation of FDI in 2002. Analysis of a matched firm–patent data set from 1998 to 2007 shows that both the quantity and quality of innovation by domestic firms benefited from the presence of FDI. Emphasizing the importance of knowledge spillover from FDI in similar technology domains, the authors examine the role of horizontal FDI and FDI in technologically close industries—those sharing similar technology domains. Findings show that the latter generates much more substantial positive spillover than the former. The paper also shows that knowledge spillover from FDI in similar technology domains is not driven by input–output linkages. In addition, the spillover effect is stronger in cities with higher human capital stock and firms with higher absorptive capacity. Les répercussions des investissements directs étrangers sur l'innovation des sociétés nationales : données probantes sur la déréglementation des investissements étrangers en Chine. Cet article étudie les répercussions des investissements directs étrangers sur l'innovation des sociétés nationales en Chine. Une stratégie d'estimation des doubles différences produit des données causales en exploitant la déréglementation des investissements directs étrangers en Chine de 2002. L'analyse d'un ensemble de données qui associent les sociétés et les brevets de 1998 à 2007 démontre qu'à la fois la quantité et la qualité de l'innovation des sociétés nationales ont tiré profit de la présente des investissements directs étrangers. Les auteurs examinent le rôle des investissements directs étrangers horizontaux et des investissements directs étrangers dans des secteurs technologiques proches, à savoir ceux qui partagent des domaines technologiques semblables, tout en soulignant l'importance de la diffusion de connaissances provenant des investissements directs étrangers vers ces domaines. Les constatations illustrent que les investissements directs étrangers génèrent une diffusion positive bien plus importante que les investissements directs étrangers horizontaux. Cet article démontre également que la diffusion de connaissances provenant des investissements directs étrangers vers des domaines technologiques semblables n'est pas stimulée par des liens intrants‐extrants. En outre, l'effet de diffusion est plus fort dans les villes où le stock de capital humain est supérieur et où les sociétés ont une meilleure capacité d'absorption.

Suggested Citation

  • Yan Liu & Xuan Wang, 2023. "The impact of foreign direct investment on innovation at domestic firms: Evidence from the deregulation of foreign investment in China," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(2), pages 676-718, May.
    • Handle: RePEc:wly:canjec:v:56:y:2023:i:2:p:676-718
    DOI: 10.1111/caje.12654
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    References listed on IDEAS

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    5. Havranek, Tomas & Irsova, Zuzana, 2011. "Estimating vertical spillovers from FDI: Why results vary and what the true effect is," Journal of International Economics, Elsevier, vol. 85(2), pages 234-244.
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