FDI’s Effect On Chinese Enterprises’ Independent Innovation

As is shown in the World Investment Report issued by U.N. in 2014, China is still the second largest country with FDI inflows in the world and the largest among developing countries. With such a large number of FDI inflows, China’s economy has been promoted. But whether the FDI inflows have an effect on Chinese enterprises’ independent innovation is still unknown. A study for this question will be important as a reference of the government’s adaptation of policies concerning FDI and encouragement of independent innovation.This paper examines the effect of FDI on Chinese enterprises’ independent innovation based on the micro-data of 2700 enterprises in the manufacturing and services industry provided by the World Bank in 2012. Different from the previous study, the empirical estimation of this paper uses a method of propensity score matching. Given a vector of covariates capturing all the information of enterprises, we construct a control group matched with the treated group in order to compare the average treatment on the treated. Another difference is using the enterprise’s R&D input, not labor productivity or TFP, as an institute of independent innovation. The findings indicate that FDI has a significant negative effect on enterprises’ R&D input, namely FDI has a negative effect on Chinese enterprises’ independent innovation. Specially, while the involvement of FDI is high, the negative effect is also significant. When the involvement is low, it is negative, but not significant.