The Role of Domestic Institutions and FDI on Innovation—Evidence from Chinese Firms

Abstract

This paper investigates the enabling factors of domestic institutions and foreign direct investment (FDI) on firm innovation in China. China has made significant institutional changes and has attracted substantial FDI, aiming to facilitate domestic innovation. Drawing on the institution-based view, we investigate how domestic institutions and FDI affect firm innovation. The results from a comparative case study of five Chinese firms and a large-sample econometric analysis based on Chinese firms reveal the positive impact of domestic institutions on innovation, but FDI is shown to have negligible effects. We argue that, given China's institutional setting, FDI may be a channel for technology transfer but this does not necessarily lead to innovation.