The Independent Innovation Effect Of FDI:Theoretical And Empirical Analysis

Since the reform and opening-up, Chinese government launched a series of policies and measures attracting Foreign Direct Investment(FDI) to constantly increase the inflow of FDI. China had been the top developing country absorbing FDIin 1993. China’s actual use of foreign capitalin 2014 reached $119.56 billion, which has maintained the first place between developing countries for 23 consecutive years, and displaced America for the first time as the top one in the world.As like as the majority of developing countries being wild about aborbing FDI, Chinese government hoped that the advanced technology and managerial experience can be brought by FDI to improve the production efficiency of local enterprises. Obviously, FDI had played an irreplaceabale rolein the economic development of China in the past 37 years.On the other hand, China still rely mainly on cheap labour force and resource depletion owing to the lack of core technology and proprietary intellectual property rights, land occupation and preferential policy to get the competitive advantage. Research data indicates that the technical progress and the investment of energy, raw materials and labor power could be occupy 80% and 20% in the economic growth of developed countries, repectively. However, China’s critical equipment and core technology of major industries nearly all depend on imports, which is diametrically opposite to developed countries. It should be considered that the weak capability of independent innovation has been a serious handicap for Chinese economic development. Therefore, Chinese party has put forward thatenhancing independent innovation will become an important support of promoting the economic restructure, strengthen international competitiveness and risk resistance capacity in the plenary session of the Party’s sixteenth.After 18 th CPC National Congress, Prime Minister Li Keqiang pointed out the development goal of promoting economic restruction through independent innovation in the second session of China’s 12 th National People’s Congress. It is a remarkable fact that President Xi Jinping emphasized in the 2014 conference of Leading Group for Financial and Economic Affairs that the strategy of innovation-driven development would be implemented as soon as possible. All signal from Chinese government are showing that the independent innovation has been elevated to a fatal level as the reform and opening-up policy.The strategy of independent innovation triggers a heated debate. Especially, some scholars provide the introspection about the strategy of exchanging market for technology that overintroduction of foreign capital would weaken the competitiveness of domestic enterprise, resulting in power of innovation. Furthermore, the “exchanging market for technology failure” indicates that FDI was crowding out domestic innovation. For this reason, perceiving and assessing the relationship between FDI and independent innovation would decide the Chinese government’s future policy orientation to FDI. In the year of 2015, under the background of current economic development phase, it would be an urgent issue to research whether FDI has its particularity, how FDI comtribute to independent innovation, and how to make appropriate policy for FDI to realize the innovation strategy.For this reason, the dissertation on the basis of the theoretical explanation for the influence of FDI on independent innovation and the induction of the elements, by doing the research the technology spillover effect of FDI and using production function, structures empirical model by collecting international and Chinese provincial datas to conduct the quantitative and comparative research for the independent innovation-effect of FDI, discuss the similarity and particularity between China and other coutries for these effects. After the theoretical and empirical analysis, the dissertation takes some typical countries as successful or failing examples and proposes some targeted policy suggestions to promote Chinese capability of independent innovation on the base of FDI. In addition, to further explore the mechanism of independent innovation-effect on FDI, the synergistic effect between FDI and independent innovation has been researched.This dissertation can be divided into five chapters, with the contents as following:The first chapter is introduction. First of all, this section will bring the background, significance and purpose of research, then pose the questions about the independent innovationeffect of FDI. Secondly, the relative key concepts will be interpreted and defined.Chapter two is mainly about theoretical basis and literature review. In the first part, the theories including FDI, the endogenous economic growth model, technological innovation, technological catching-up, internalization, and comparative advantage will be employed to explain the impact of FDI on independent innovation. For these impacts, the second part systematically combs three effects including promotion, inhibition and dual sides, five channels to militate, both the macro and micro dimensions of factors to bring different results from theoretical and empirical Chinese and foreign literatures, which find that FDI, R&D input, and innovation environment would be the main impacts on independent innovation.Chapter three explains and analyzes the mechanism of FDI and independent innovation. Based on the theory of technology spillover effect, the section will expound four theoretical models about the effects of FDI to innovation which include demonstration-limitation and competition effect, linkage effect, human capital effect, and R&D-absorption effect. Consequently, this section concludes that FDI can influence innovation by technology transformation, promotion and inhibition, analyzes the macro-factors and micro-elements(e.g., the level of digestion and absorption, the level of human capital, international competitiveness, technological gap, economic and financial environment) impacting independent innovation, and dissects the mechanism of the positive and negative effects.The fourth chapter is the empirical research of international data for FDI and innovation. Firstly, on the base of relative theoretical and empiriacal literature about FDI and innovation, FDI and independent innovation have been chosen as explanatory variable and explained variable respectively in the empirical model. Secondly, the control variables would be determined on the base of the technical innovation power theory and national innovation system theory to build the dynamic panel regression model about the correlational analyses between FDI and independent innovation. In the regression analysis, the sample will be divided into three groups including the developed countries, the developing countries(the exception of BRICS) and the BRICS countries for the comparison of variance on relationship between FDI and innovation by different economic level. The following main conclusions could be drawn from the study: First, there is a negative correlation between R&D manpower input and patent application in the majority of developed countries. The relationship shows positive correlation in China and India, on the contrary. Second, whether developed countries or developing countries, R&D input, economic level and enterprise competitiveness would play very important role in the innovation effect of FDI, and the relationship show markedly positive. Third, besides US, UK, Australia, Germany, Mexico and Sweden, the mechanism for independent innovation effect of FDI has been validated by quantitative model in the other countries. For China, the positive effect of R&D, competition and human capital are very outstanding. However, there are various negative effects being validated such as the inhibiting effect of human capital for France, Netherland, Canada, Columbia and Mexico and the the inhibiting effect of R&D for Spain, Belgium, Columbia and Brazil. Fourth, FDI inflow will bring significantly positive influence to the innovation level of host country, especially for developing countries. Meanwhile, the effectiveness also depends on several elements. For example, the innovation effect of FDI will be more obvious in the competitive countries.The second part at chapter four will be relevant international case studies. This section will separately analyze the evolution of taking advantage of FDI to improve independent innovation. Specifically, some typical countries in which FDI significantly promotes independent innovation such as the United States, Japan and India will be described in detail. On the other hand, some Latin American countries in which FDI inhibits innovation because of over reliance on external techniques and economic weakness would be discussed. It may enriches the researches above to be a steppingstone of policy suggestion.The fifth chapter is about the empirical research for the independent innovation effect of FDI from the evidence of China. This section emphasizes on opening the black box of independent innovation in which the micro factors would be quantified to research the relevance with FDI for the quantitative analysis of the mechanism. Besides building the time sequence model, the provincial panel data would be used to study. The main conclusions are as follows: First, the FDI inflow and patent application are positively correlated relationship, which means FDI contributes to the innovation capacity for China. However, the small coefficient indicates that absorption capacity of Chinese enterprises should be intensified. Furthermore, compared with human capital input, Chinese innovation is more dependent on R&D input, and the technology from FDI cannot replace the local research and development. Second, there are significant positive correlations between the the innovation capacity and the variables of real GDP per capita and the dependence on foreign trade, respectively. This result would reflect the achievement of changing the way of economy development and adjusting industrial structure. Third, under the 1% significant level, there is significant positive impact on the index of legal and financial environment and innovation capacity, which also manifests that a financially and legally perfect market will play an essential role in the development of innovation. Fourth, the result of empirical study about cross term shows that FDI inflow, for China, affects innovation through three channels including competitive effect, R&D effect, and learning-talent effect.Chapter six will research the synergy effect between FDI and innovation. Based on 1985-2013 time series data of China, the Unit Root Test and Granger Causality Test are adopted to research the issue whether there is a synergistic effect between FDI and independent innovation. The result shows that FDI and independent innovation form the reciprocal Granger causality, which exists the synergistic effect. The following primary conclusions would be drawn by quantitiative studies:First, the result of Granger Causality Test demonstrates that there is synergistic effect between FDI and independent innovation. Second, FDI is the Granger reason of independent innovation, which means FDI would have a positive impact on raising Chinese innovation capacity. Third, there would be a lagging effect on that positive influence beacause of the weak absorption capacity and the low quality of FDI. Fourth, the ability of independent innovation also would be the Granger reason of FDI, which means that improving innovation lead to the growth of FDI on account of technology transformation and well-appointed marketing system. Fifth, promoting capacity of innovation by FDI is simply not an overnight process due to the lag on the the independent innovation-effect of FDI, which need to repeat the course of introduction, absorption, then innovation.Ultimately, at chapter eight, according to the theoretical and empirical conclusion and realistic situation, some corresponding suggestions will be built in order to promote the adjustment and deepening of China’s reform and opening-up strategy.Compared with the existing studies, the innovativeness of this dissertation would be reflected in the following four aspects:Primarily, the main action mechanism behind FDI impacting innovation has been theoretically explained in detail. This dissertation combines with main theoretical model such as demonstration-limitation and competition effect, linkage effect, human capital effect, and R&D-absorption effect, to analyze the influence factors of innovation in depth, and then discusses the correlation between FDI and innovation to excavate the mechanism in it. To some extent, there are few research to do it.Next, the empirical and comparative analysis are utilized to research the difference between developed countries and developing countries for FDI-innovation relationship. This dissertation structures dynamic panel model in the international level to study, and divides the simple into three kinds as developed countries, developing countries and BRICS to contrast the difference and find the reason, which would be a further expansion for the existing empirical studies.Furthermore, the dissertation open the black box of the mechanism of the independent innovation effect of FDI by empirical research. On the base of explanatory mechanism of those effects in theory, some key determinants will be quantified to build the time series model and the panel model to investigate the mechanism. The empirical studies of chapter four and chapter five could be not only the verification and deepening of theoretical research, but also make up for gaps in domestic empirical study on the mechanism of FDI-innovation effect.Last but not least, the empirical study on synergy effect between FDI and innovation would be a lightspot. Most researching papers analyze the connection of FDI and technical progress, or the spillover effect of FDI, or the problem whether FDI can be conducive to independent innovation, but few scholar research the synergy effect of them. As a result, the Unit Root Test and Granger Causality Test are adopted to preliminarily research the issue whether there is a synergistic effect between FDI and innovation, which aims to provide a positive reference for the future evolving research the mechanism of FDI-innovation synergistic effect.