FDI deregulation and firm innovation: evidence from firm patents

This paper studies whether inward FDI deregulation promotes innovation by firms in the host country. A theoretical framework, in which the entry of additional foreign firms is associated with both spillover and competition effects, is built to guide the empirical evaluation. Exploiting data on Chinese firm-level patents in a difference-in-differences setting, this paper finds a positive and significant impact of FDI deregulation on firm innovation. Moreover, we find that FDI deregulation had a heterogeneous effect on firms: the impact was prominent on firms with high productivity while being insignificant on firms with low productivity.