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Foreign direct investment, access to finance, and innovation activity in Chinese enterprises

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  • Sourafel Girma
  • Yundan Gong
  • Holger Görg

Abstract

This paper investigates the link between inward FDI and innovation activity in China, using a very comprehensive and recent firm level database. We pay particular attention to the impact of domestic access to finance. Our results show that firms with foreign capital participation or those with good access to domestic bank loans innovate more than others do. We also find that inward FDI at the sectoral level is positively associated with domestic innovative activity only if firms engage in own R&D or if they have good access to domestic finance. However, access to finance only plays a role for private or collectively owned firms, less so for state-owned enterprises. Furthermore, we distinguish the effect of sector level inward FDI into technology transfer and FDI affecting domestic credit opportunities and find that the latter is of very little significance for SOEs and is also independent of their access to finance. By contrast, it is an important channel through which FDI affects the innovation of domestic private and collectively owned enterprises.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1400.

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Length: 26 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:kie:kieliw:1400

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Keywords: FDI; finance; China;

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  1. Harrison, Ann E. & Love, Inessa & McMillan, Margaret S., 2004. "Global capital flows and financing constraints," Journal of Development Economics, Elsevier, Elsevier, vol. 75(1), pages 269-301, October.
  2. Philippe Aghion & Nicholas Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2002. "Competition and Innovation: An Inverted U Relationship," NBER Working Papers 9269, National Bureau of Economic Research, Inc.
  3. Harrison, Ann E. & McMillan, Margaret S., 2003. "Does direct foreign investment affect domestic credit constraints?," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 73-100, October.
  4. Chiara Criscuolo & Jonathan E. Haskel & Matthew J. Slaughter, 2005. "Global Engagement and the Innovation Activities of Firms," NBER Working Papers 11479, National Bureau of Economic Research, Inc.
  5. International Monetary Fund, 2005. "Trade Costs and Location of Foreign Firms in China," IMF Working Papers 05/55, International Monetary Fund.
  6. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
  7. Albert G. Z. Hu & Gary H. Jefferson & Qian Jinchang, 2005. "R&D and Technology Transfer: Firm-Level Evidence from Chinese Industry," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 780-786, November.
  8. Ann P. Bartel & Ann E. Harrison, 2005. "Ownership Versus Environment: Disentangling the Sources of Public-Sector Inefficiency," The Review of Economics and Statistics, MIT Press, vol. 87(1), pages 135-147, February.
  9. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, Elsevier, vol. 36(3), pages 231-250, November.
  10. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 679-85, May.
  11. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
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Cited by:
  1. Horst Raff & Natalia Trofimenko, 2013. "World Market Access of Emerging-Market Firms: The Role of Foreign Ownership and Access to External Finance," CESifo Working Paper Series 4346, CESifo Group Munich.
  2. Horst Raff & Joachim Wagner, 2013. "Foreign Ownership and the Extensive Margins of Exports: Evidence for Manufacturing Enterprises in Germany," CESifo Working Paper Series 4337, CESifo Group Munich.
  3. Natasha Agarwal & Chris Milner & Alejandro Riaño, 2013. "Credit Constraints and FDI Spillovers in China," CESifo Working Paper Series 4313, CESifo Group Munich.
  4. ITO Banri & YASHIRO Naomitsu & XU Zhaoyuan & CHEN Xiaohong & WAKASUGI Ryuhei, 2010. "How Do Chinese Industries Benefit from FDI Spillovers?," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 10026, Research Institute of Economy, Trade and Industry (RIETI).
  5. Megha Mukim, 2012. "Does Agglomeration Boost Innovation? An Econometric Evaluation," Spatial Economic Analysis, Taylor & Francis Journals, Taylor & Francis Journals, vol. 7(3), pages 357-380, September.

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