Does Foreign Investment Raise Firm Innovation?

Abstract

This paper studies whether foreign investment deregulation promotes firm innovation. A theoretical framework, in which the spillover and competition effects from more foreign firms induced by foreign investment deregulation, is built to guide the empirical evaluation. Exploiting the data on Chinese firm-level patents in a difference-in-differences setting, this paper finds a significantly positive impact of foreign investment deregulation on firm innovation. Moreover, this paper finds a robust heterogeneity that the impact is prominent in the firms with high productivity while being not significant in the firms with low productivity.