Foreign Firms and Indigenous Technology Development in China

China is currently promoting indigenous technology development thought support of Chinese firms and, arguably, by restricting operations of foreign multinational firms. This policy seems to overlook the impact of foreign firms on technology development in local firms. For instance, technology might leak out to local firms though spillovers. Moreover, competition from foreign firms might force local firms to engage in technology development. We examine the impact of FDI on technology development in China. We start by surveying a large and growing literature on FDI and spillovers in China. Most previous studies find evidence of positive spillovers. We then continue to examine the effect of FDI on competition in the Chinese manufacturing sector and the effect of competition on firms’ R&D. Our analysis is conducted on a large dataset including all Chinese large and medium sized firms over the period 1998-2004. Our results show that FDI increases competition but there are no strong indications of competition affecting investments in R&D