The correlation between FDI and knowledge transfer, & their effect on domestic innovation : evidence from China

This study attempts to explore the correlation between foreign direct investment (FDI) inflows and foreign knowledge transfer in China. More specifically, the study empirically investigates the feedback effect of foreign knowledge transfer from multinational corporations (MNCs) on FDI in the Chinese context. Also, the relationship between international knowledge transfer through FDI and indigenous firms' innovation is examined. Furthermore, in order to fill the gap in the literature, the study probes the impacts of WTO accession on FDI inflows to China and on domestic innovation development. Using different methodologies, this paper conducts a longitudinal study based on a unique, country-level dataset (patent data) from China. The empirical evidence supports the view of FDI as a vehicle of foreign advanced technology inflowing to China. The more technologies transferred to China, the more investments MNCs make, which spurs the domestic firms to promote their own R&D activities. Accordingly, the improvement of domestic innovative capacity will attract more advanced technology and FDI inflows to China. Also, the WTO accession seems to have had positive effects on drawing FDI inflows and foreign knowledge transfer to China