Spillover effects of FDI on the R&D capacity of domestic firms: The case of China

Foreign, direct investment (FDI) has a pervasive influence on the industrialization of the developing world. One important reason for attracting inward FDI lies in the fact that host country wants to achieve technology progress through FDI. However, the arguments of whether FDI benefits the host country are still going on in the main stream of literature. We found that most of the studies on spillover effect of FDI carried out from the perspective of labour productivity or total factor productivity. Few studies talked about the topic from the perspective of innovation capability. In this study, by using the panel provincial data of Chinese large and medium sized industrial enterprises from 1998 to 2003, we empirically examined impact of FDI on the R&D capacity of Chinese domestic firms. Using the panel approach, we observe strong and positive spillovers of FDI both in fixed effect and random effect models. The foreign presence does have positive effect on the number of patent applications of the domestic firms. In addition, evidence also indicates that FDI-related firms are in an inferior position comparing with their local counterparts in terms of aggregate domestic patent applications while they do show advantages in R&D capacities if we match the patent applications with the S&T personnel.