Does two-way FDI promote technological innovation? — Evidence from China

Two-way FDI indicates that China's technological catch-up process has entered a new stage. Mechanisms and conditions through which two-way FDI affects technological innovation require urgent attention. Based on China's provincial panel data, by using 2SLS tests, negative binomial model, and GMM estimation, this study finds that two-way FDI has a significant promoting effect on technological innovation, absorptive capacity has a positive moderating effect on the relationship between two-way FDI and technological innovation, and IPR protection has a negative moderating effect on the relationship between two-way FDI and technological innovation. The heterogeneity test shows that the interaction effect of IFDI, OFDI, and the moderating effect of absorptive capacity increase with the regional economic development and the passage of time. In contrast, the negative moderating effect of IPR protection decreases. This study contributes to the understanding of the two-way FDI at play in the technological innovation of emerging markets. It emphasises the promoting and restricting factors of two-way FDI in this process. •The way that emerging markets rely on two-way FDI to achieve innovation catch-up has changed the trajectory of traditional innovation development.•Absorptive capacity positively moderates the relationship between two-way FDI and technological innovation.•IPR protection negatively moderates the relationship between two-way FDI and technological innovation.