The impact of FDI technology spillover on the innovation quality of Chinese enterprises: a microperspective based on geographic proximity

Abstract

PurposePrevious studies have reached inconsistent conclusions on foreign direct investment (FDI) technology spillovers and corporate innovation. The main purpose of this paper is to explore the technological spillover effects of FDI from the microperspective of firm linkages induced by geographic distance. Further analysis is conducted on the impact and mechanism of this spillover on the innovation quality of Chinese enterprises. The conclusions drawn from this paper can guide Chinese enterprises' foreign capital utilization and innovation strategy choices.Design/methodology/approachUsing the data of China's A-share listed companies from 2009 to 2019, this paper explores the role of FDI technology spillover in enterprise innovation quality through a two-way fixed-effect model. The robustness of the results is proven by substituting variables, adding industry fixed effects and excluding high-profit groups, and further using the two-stage least squares (2SLS) method to alleviate the empirical endogeneity problem.FindingsThese findings indicate that FDI technology spillover based on geographic proximity has a positive impact on the innovation quality of Chinese enterprises. However, there are different impacts for different types of enterprises. FDI technology spillover has a positive impact on the innovation quality of non-state-owned enterprises (non-SOEs) and small- and medium-sized enterprises (SMEs), while it has no effect on state-owned enterprises (SOEs) and large enterprises. The authors also find that the degree of financing constraints and R&D investment are important transmission mechanisms between FDI technology spillover and enterprise innovation quality.Research limitations/implicationsThis study ignores industry characteristics when considering foreign enterprises around Chinese enterprises. In fact, technology spillover effects differ across industries. When the authors matched microdata to regions, only the provincial level was considered. Therefore, there is still room for further research. In future research, the authors should consider industry characteristics and group foreign enterprises and Chinese enterprises in the same industry and in different industries to explore industry differences in technology spillover. In addition, when matching corporate data to regions, the authors can match to the city level and draw city-level conclusions.Practical implicationsThis study is different from previous studies that focus on the quantity of enterprise innovation or innovation output. The authors focus on the role of technological spillovers in the quality of Chinese enterprise innovation, enriching research in the field of enterprise innovation quality. In addition, the current FDI technology spillover indicators are technically difficult to measure at the micro level. The authors draw inspiration from the theory of the geographical structure of financial supply and combine the creation methods of macro and micro indicators in existing articles in other fields. The authors ingeniously construct a new FDI technical spillover indicator. This indicator combines the commonly used regional FDI technology spillover with the geographic proximity of enterprises at the microlevel by constructing an interaction term between the two. This indicator not only alleviates the endogeneity problem to a certain extent but also has implications for future research in the field of FDI technology spillovers at the micro level.Social implications(1) FDI technology spillovers are an effective way to improve the innovation quality of local enterprises, especially for non-SOEs and SMEs. Therefore, The authors suggest that in the context of dual circulation, the Chinese government should continue to open wider to the outside world and encourage foreign enterprises to invest in China. (2) In future development, managers of SOEs and large enterprises should create an innovation incentive mechanism. Moreover, they should change their vertical management structure and make full use of their policy advantages and budget advantages to increase innovation activities. In the process of acquiring technology spillovers, enterprises need to solve their own financing constraints.Originality/valueFirst, this study solves a technical problem. It is technically difficult to measure the current FDI technical spillover indicators at the micro level. This study innovatively constructs a new FDI technology spillover indicator that combines regional FDI technology spillovers with the microperspective of the geographical proximity of enterprises. This approach not only alleviates certain endogeneity problems in the empirical evidence but also enriches relevant research in the field of technology spillover. In addition, this study focuses on the impact and mechanism of this spillover, which addresses the current research gap among previous studies that mainly focus on innovation quantity and ignore innovation quality.

Does proximity matter? The effect of financial sector development on economic growth in the EAC and SADC regional blocs

“…First, a neighbor country bene ts from reduced transport costs for manufactured consumables compared to a distant country. Second, the neighbor can obtain supplies for its infant industry at a lower cost thus attracting the spillover eect locally in terms of knowledge, innovation, information and support services (Harris, 1954;Liu et al, 2022;Yue et al, 2022;Amidi and Majidi, 2020).…”

“…If these imports are consumables rather than capital goods from a nearby trade center giant, both shortrun and long-run growth may be negatively aected. Theoretically, it is not a matter of proximity rather proximity to a center country is what provides an additional spillover advantage, as observed with regard to FDI innovation and technology spillover to local enterprises in China (Yue et al, 2022). There is also evidence that spillovers in terms of policy diusion in proximal countries have been on the rise (Mossig et al, 2022).…”

“…Half of the world trade occurs between partners that are less than 3,000 kilometers apart (Berthelon and Freund, 2004). Geographic proximity, therefore, provide the ease/di culty with which goods, services, labor, capital, information, and ideas traverse in space (Yue et al, 2022;World Bank, 2009;Shabani et al, 2011). Although geographic proximity is generally related to Euclidean distances between two locations, in economic geography distance, it can either be economic, physical, or both (McCann and Oort, 2019).…”

The Urgency of Foreign Direct Investment in Micro, Small, and Medium Enterprises Financing Framework: The Case of Indonesia

“…Lembcke and Wildnerova (2020) found that FDI tent to be associated with some growth in small firms from the study on 13 OECD countries. Yue et al (2022) found that FDI technology spillover has a positive impact on the innovation quality of MSMEs in China. Dimovski (2020) found that Macedonian MSMEs that cooperate with multinational enterprises have increased performance.…”

“…While the research on FDI's role on MSMEs growth is still limited, available research is generally supportive of the positive role of FDI (Islam & Chitakunye, 2019;Hernandez & Nieto, 2016;Yue et al, 2022;Li & Hu, 2013;Lembcke & Wildnerova, 2020). Islam and Chitakunye (2019) found that FDI is a significant factor for MSMEs growth strategies in the context of food industry in Bangladesh.…”