Working Paper: CEPR ID: DP5838
Authors: Sourafel Girma; Yundan Gong; Holger Grg
Abstract: We investigate whether inward FDI, either at the firm or industry level, has any impact on product innovation by Chinese State owned enterprises (SOEs). We use a comprehensive firm level panel data set of Chinese SOEs covering the period 1999 to 2003. Our results show that foreign capital participation is associated with higher innovative activity. Inward FDI in the sector has a negative effect on innovative activity in SOEs. However, there is a positive effect of FDI on SOEs that export, invest in human capital or R&D, or have prior innovation experience. We also find that SOEs with internal R&D activity and human capital development are successful innovators. Hence, our results suggest that rather than relying on sector level inward FDI to improve domestic innovative activity, it is important to get the firm-level fundamentals right.
Keywords: China; Competition; FDI; Innovation; Spillovers; State-Owned Enterprises
JEL Codes: F23; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign direct investment (FDI) (F23) | innovation activity (O35) |
| foreign capital participation (F21) | higher innovative activity (O31) |
| inward FDI at the sector level (F23) | innovative activity of SOEs (O35) |
| SOEs that are already engaged in R&D (O32) | benefit from FDI (F23) |
| SOEs that are exporting (F10) | benefit from FDI (F23) |
| SOEs that have prior innovation experience (O35) | benefit from FDI (F23) |
| greater absorptive capacity (F35) | likelihood to innovate in the presence of FDI (F23) |
| foreign capital participation (F21) | innovation (O35) |
| firm-level fundamentals (D22) | leverage benefits of FDI for innovation (F23) |