When does knowledge similarity help foreign firms improve performance?

This paper investigates whether knowledge similarity improves the performance of foreign firms and, if so, when. Using panel data on foreign and local firms in China for the years 1998-2007, we empirically find a positive relationship between knowledge similarity and the performance of foreign firms. We find two moderating factors for the relationship, namely foreign ownership share, a firm-level factor that positively moderates the relationship, and market-oriented institution, a province-level factor that negatively moderates the relationship. Our findings identify the detailed theoretical mechanism for the effects of knowledge similarity on the performance of foreign firms under different moderating conditions.