Examining the Effects of FDI on Innovation and Exploring the Role of Knowledge Transfer in the Innovation

: Empirical Analysis of China’s FDI in the UK

Abstract

Deploying knowledge from inwards foreign direct investment (IFDI) has been becoming essential for local firms in gaining and developing their competitive advantages, which has become one of the vitally important driving forces for the development of host countries in the future. Purpose: This study aims to examine whether and how the China’s FDI (Inward FDI) affects regional innovation performance using panel data of China’s FDI in the UK and explore the role of knowledge transfer in the process of regional innovation of the UK. Design/methodology/approach: The system Generalized Method of Moments (GMM) is chosen to correct for the endogeneity of the dependent variable. An empirical analysis is conducted to test the effects of China FDI on the innovation in 12 regions in the UK over the period of2010-2020. In the second stage, the results drawn from the quantitative analysis in the first stage and other relevant topics are explored with interviews in the qualitative analysis. The exploratory study is conducted to investigate the role of KT and the innovation process further in 22 semi-structured interviews with 12 Chinese companies in the UK. Findings: The empirical results show that the China’s IFDI has significantly positive impacts on the regional innovation performance in the UK and three variables---R&D intensity (RDI), absorptive capacity (ACS) and trade present negative effects. In the qualitative analysis,the exploratory study finds some specific characteristics of China FDI, including “Exchange of interests” is a new approach to knowledge transfer (KT)and “On-the-spot technical support and training”is the main form of KT. Chinese FDI is actively involved in a “Combined module”of innovation collaborating with local firms. This study also finds that the Chinese researchers are good at incremental innovation, while the UK partners are good at disruptive innovation. Both innovation systems can complement each other and foster further cooperation and innovation. Research limitations/implications: This research is not without limitations. Firstly, it failed to take account of the management innovation and theoretical innovation in the quantitative study due to data limitations. Future research can consider both innovations in the models and find methods to measure or evaluate them, which may present different pictures. Secondly, it has a relatively small sample size, and the samples are limited to within the UK. With a large sample size and data of more counties or areas, the results of this research would have stronger bases. Thirdly, it did not further explore in detail the cultural perspectives and political risks that have appeared in the interviews. Expanding the scope of the study will produce a more comprehensive understanding of the effects of FDI on innovation, and thus our empirical results will be changed accordingly. Therefore, future research could pay more attention to how to take advantage of the FDI to improve cooperation in innovation among companies with different cultures. Originality/value: The study proposes FDI platform view, innovation factors holistic implementation view, and the dynamic transnational innovation model, which enrich the understanding of FDI and redress some opinions of FDI in the literature. It not only corroborates Organizational Diversity theory (ODT)and Information decision-making theory (IDT), but also extends their application scope by utilizing them in the process of KT and innovation development experienced by MNEs. It also makes the Uppsala model extension and OLI model extension. Finally, the research examines the role China’s FDI plays in mediating and boosting KT and innovation but does so in a very different economic context of the UK, rather than in a developing country. It further extends the existing research and research areas in the relevant literature.