August 2006

IZA DP No. 2267: Can You Teach Old Dragons New Tricks? FDI and Innovation Activity in Chinese State-Owned Enterprises

revised version published as "What determines innovation activity in Chinese state-owned enterprises? The role of foreign direct investment" in: World Development, 2009, 37(4), 866-873

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.