Does foreign direct investment enhance or inhibit regional innovation efficiency? Evidence from China

Purpose: The purpose of this paper is to examine whether foreign direct investment (FDI) inflow impacts on regional innovation efficiency in China and whether the impacts of FDI are contingent on regional conditions that may maximize the effect of FDI on regional innovation efficiency. Design/methodology/approach: Using panel data of 30 provinces from 2000 to 2010, the authors first used data envelopment analysis to measure regional innovation efficiency, followed by a spatial panel model to test research hypotheses concerning the effect of FDI on regional innovation efficiency and the direct and moderating effects of regional characteristics such as regional innovation environment, regional absorptive capacity and regional complementary assets. Findings: The paper finds that there are considerable inter-regional and intra-regional variations in innovation efficiency in China and that regional variations in innovation efficiency in China can first be explained by the differences in inflow FDI and then be accounted for by the direct and moderating effect of regional innovation environment, absorptive capacity and complementary assets. Research limitations/implications: The research findings have three policy implications. First, governments should continue their efforts to increase the transparency and predictability of the framework for inward FDI and align FDI with the region’s strategic priorities of development to improve innovation efficiency. Second, governments should develop holistic and coherent policies that address the key aspects of regional conditions conducive to the inflow of FDI. Third, governments at the regional level should cultivate an open innovation environment and support the development of financial markets to maximize the positive effect of FDI technology spillover and externalities. Originality value: This paper fills a gap in research on the spatial heterogeneity characteristics of spillover effects of FDI on regional innovation efficiency.