FDI in services and firm innovation

Abstract

This study explores how FDI in services impacts manufacturing firms’ innovation, using China's FDI access relaxation in services as an exogenous shock. Our findings indicate that FDI in services significantly reduces firms’ innovation. Firms with greater openness to FDI in services have significantly lower numbers of patent applications and citations. FDI in services leads to an increase in foreign input imports but a decrease in innovation investment, with more pronounced effects on firms relying more on foreign inputs. We suggest that FDI in services encourages the use of foreign inputs by reducing their relative costs, thereby crowding out innovation. Human capital, Internet, and subsidy can mitigate the negative effects of FDI in services on innovation.