Globalization, Foreign Direct Investment, and Regional Innovation in China

This paper explores the connection between the external opening of China and differences in innovation across Chinese regions. For the period 1995-2010, we find that regions that attract inward foreign direct investment (FDI) and exports have become more innovative. Further, we show a U-shaped relation between globalization, regional income levels, and innovation, where both the lower middle-income and the most advanced regions gain from globalization in terms of increased innovation. The higher middle-income regions gain little from globalization in terms of innovation. We provide evidence that differences in ownership structures of foreign investments and outsourcing drive the results.