Technology-seeking FDI policy change and local firm innovation

Abstract

Many emerging market governments have increased technological entry thresholds for foreign newcomers to promote technology transfer to local firms. Although such a policy change intensifies the threat from new foreign entrants in the long run, it protects local firms from intensive competition in the short run. Thus, whether local firms in the same industries will respond to such a policy change with more technological efforts remains to be discovered. We hypothesize that local firms in affected industries will refrain from upward momentum in innovation activities to some extent compared with local firms in industries without such a policy change. We also hypothesize that local firms in more robust resource and market positions will be influenced to a lower degree. Difference-in-difference modeling based on large panel datasets in China supports these hypotheses. This study provides novel insights into the international business literature by identifying that foreign-entry policy shifts may cause indirect effects on the innovation of local firms.