The contribution of inward FDI to Chinese regional innovation: the moderating effect of absorptive capacity on knowledge spillover

Abstract

In the regional context of China, this paper examines the extent to which Absorptive Capacity (ABC) contributes to the host country's utilisation of Inward Foreign Direct Investment (IFDI) knowledge spillover and innovation. The findings suggest that the presence of IFDI per se exercises a 'crowding-out' effect on local firms' innovation. In contrast, ABC has a significantly robust moderating effect on innovation so that host country firms' gains from IFDI knowledge spillover depend on whether their ABC offsets the negative impact of the IFDI. Such effects are more evident in coastal areas of China, where the economic mode permits more IFDI and also higher levels of ABC. Incremental innovation is more likely to be expelled by IFDI and motivated by technology elements of ABC, while radical innovation depends more on the human capital aspect of ABC. Our study strongly demonstrates the role of ABC as a moderator of IFDI knowledge spillover.