Foreign Direct Investment Financial Constraints and Innovation - Evidence from Chinese Micro-firms

Abstract

This paper investigates the effect of Foreign Direct Investment ??FDI?? on independent innovation in Chinese domestic firms, using the micro-level data in Chinese firms from 1998 to 2003. We pay particular attention to the impact of domestic access to finance. The empirical results show: Firstly, firms with foreign capital participation (Firm-level FDI) or those with good access to domestic bank loans innovate more than others do??Secondly, we also find that FDI at the industry level is positively associated with innovation in Chinese domestic firms only if firms engage in own R&D or they have good access to domestic finance. Third, the estimation results of different ownership enterprises show that the effect of domestic financing constraints on innovation of private enterprise and collective is greater than the state-owned enterprises and the response of innovation of private enterprises and collective enterprises to domestic financing constraints are more sensitive than state-owned enterprises.