Does FDI bring knowledge externalities for host country firms to develop complex technologies? The catalytic role of overseas returnee clustering structures

Abstract

Prior research has extensively studied FDI spillovers on broadly defined technological innovation but offered inconclusive evidence. Relatively little is known about how the knowledge characteristics of local technological development are shaped by FDI and the innovation context where this development takes place. We therefore study the influence of FDI presence on host country firms' technological progress with a focus on two factors: the underlying technological characteristic, complexity, which reflects the difficulties in recombining diverse knowledge combination for innovation, and an under-studied contextual contingency: the local clustering of returnees (skilled returned migrants) that creates different interactive environments for incorporating foreign knowledge. Using a unique sample of 35,376 firms over an 11-year period in China's equivalent of Silicon Valley, Zhongguancun, we reveal that FDI exerts a curvilinear spillover effect on local firms' technological complexity. Furthermore, we find returnees' clustering in related sectors heightens the effect of FDI spillovers on local technological complexity, whereas unrelated sectoral clustering flattens this U-shaped relationship, reducing FDI spillovers. We add to the debate on FDI knowledge externalities by highlighting the importance of considering knowledge characteristics and the contextual setting of returnee clustering in understanding FDI spillover effects on local technological progress. Theoretical and practical implications are discussed.