Innovation from Spatial Spillovers of FDI and the Threshold Effect of Urbanization: Evidence from Chinese Cities

The trends in the globalization and spatial agglomeration of economic activities offer new perspectives to study the determinants of innovation. To examine the spatial spillovers of foreign direct investment (FDI) in promoting regional innovation and explore the underlying mechanisms, this study employed a spatial autoregressive model and a threshold regression model to analyze a panel dataset of 253 cities in China from 2003 to 2017. It was found that FDI significantly promotes regional innovation and that there are positive and significant spatial spillovers among cities. The results indicate that innovation is characterized by spatial agglomeration and that the diffusion of technology and knowledge from FDI contributes to the formation of coordinated innovation and development among neighboring cities. Furthermore, the threshold regression analysis indicates that the relationship between FDI and regional innovation depends on the urbanization level. FDI has a positive effect on regional innovation in China once above a certain threshold of urbanization, which demonstrates the heterogeneous effect of FDI spillovers on innovation in China. This study deepens the understanding of how FDI spurs innovation that leads to an increase in the sustainable competitive advantages across regions in emerging markets