Geographical FDI knowledge spillover and innovation of indigenous firms in China

• Published in: International business review 2016-08, Vol.25 (4), p.895-906
• Main Authors: Wang, Cassandra C., Wu, Aiqi
• Format: Article
• Language: English
• Subjects: China; Electronics industry; Geographical FDI knowledge spillover; Horizontal spillover; Product innovation; Vertical spillover
• ISSN: 0969-5931; 1873-6149
• DOI: 10.1016/j.ibusrev.2015.12.004

•We investigate the geographical FDI knowledge spillover effects on innovation of domestic firms in China's electronics industry.•Localized innovative activities of foreign firms exerted significantly positive influences on product innovation of domestic firms.•Geographical FDI horizontal spillover is more valuable than that of vertical spillover and FDI horizontal and vertical spillover reinforced each other to affect innovation of domestic firms.•Inter-sector knowledge source is positive and significant but intra-sector spillover appears insignificant to innovation of domestic firms.•FDI knowledge spillover is significantly stimulated and accelerated by the innovation of local domestic firms. In recent decades, theoretical debate on firm innovation has considered particular forms of spatial clustering and foreign direct investment as almost mutually exclusive drivers. While cluster literature pays less attention to firm heterogeneity in ownership structure, FDI literature ignores the importance of geographical dimension in spillover effects. This study combines these two lines of theoretical inquiry to investigate regional FDI knowledge spillover effects on product innovation of China's indigenous electronic firms. It is found that localized innovative-related activities of foreign-invested firms significantly facilitate product innovation of domestic firms. However, FDI horizontal spillover is more important than vertical spillover and cross-sector rather than intra-sector knowledge is significant for indigenous innovation. FDI spillover effects can be reinforced by local innovative activities of domestic firms. This study highlights the significance of geographical proximity and relatively heterogeneous knowledge in FDI spillover effects on domestic innovation but questions the mutual trust relationship between foreign and domestic firms in a cluster.