Outward FDI: National and Regional Policy Implications for Technology Innovation

A significant contributor to China’s growth over the last 20 years is the ‘go-out’ policy, that is, for domestic firms to invest in international firms and has seen it develop a foundation of high technology industries and world leading research. We find that across China, the ‘go-out’ policy needs support from provincial governments in terms of human capital, basic research and infrastructure to ensure that imported technology is effectively absorbed into the local economies. This means a national strategy needs local tuning to the needs of the region. Across all provinces, we find that during the period 2006 to 2016 outward foreign direct investment (OFDI) spillovers have a significant and positive impact on technology innovation as measured by patents. OFDI alone is insufficient and may crowd out local research and development (R&D), as such, those provinces need to get to a threshold of absorptive capacity in basic, applied research supported by human capital and R&D capital stock. When the gap between a province and the rest of the world is large then OFDI could have a crowding out effect without the province supporting basic research. We test for structural changes across all provinces by classifying them by either having large or small frontier technology, the proxy for absorptive capacity. We find that the role of human capital and basic research changes substantially between small gap and large gap provinces indicating that regional policy makers need to ensure that policies are fine tuned to the stage of development in a particular region and will change over time. OFDI effects are diminished as the provinces gap reduces and this may be particularly timely in the face of China being subject to increasing trade and investment pressure internationally.