Spillover effects of FDI on innovation in China : evidence from the provincial data

Foreign direct investment (FDI) can benefit innovation activity in the host country via spillover channels such as reverse engineering, skilled labor turnovers, demonstration effects, and supplier-customer relationships. Using provincial data from 1995 to 2000, we find positive effects of FDI on the number of domestic patent applications in China. This finding is robust under both pooled time-series and cross-section data estimation and panel data analysis and for different types of patent applications (invention, utility model, and external design). The spillover effect is the strongest for minor innovation such as external design patent, highlighting a "demonstration effect" of FDI.