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The World Bank Economic Review Advance Access published online on June 11, 2008
The World Bank Economic Review, doi:10.1093/wber/lhn009
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© The Author 2008. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Foreign Direct Investment, Access to Finance, and Innovation Activity in Chinese Enterprises

Sourafel Girma, Yundan Gong, and Holger Görg

Correspondence: Email address is sourafel.girma{at}nottingham.ac.uk

JEL codes: O31, F23, G32

A recent, comprehensive database is used to investigate the link between inward foreign direct investment (FDI) and innovation activity in China. The results of the analysis suggest that private and collectively owned firms with foreign capital participation and those with good access to domestic bank loans innovate more than other firms do. Among enterprises not owned by the state, inward FDI at the sectoral level is positively associated with domestic innovative activity only among firms that engage in their own research and development or that have good access to domestic finance. At the sector level the effect of inward FDI into technology transfer is distinguished from the effect on domestic credit opportunities. FDI affecting credit is of little significance for state-owned enterprises and is independent of their access to finance. In contrast, better access to credit is an important channel through which FDI affects the innovation of domestic private and collectively owned enterprises.

Sourafel Girma is a professor of industrial economics at the Nottingham University Business School and is a fellow at the Leverhulme Centre for Research on Globalisation and Economic Policy at the University of Nottingham; Yundan Gong is a researcher at the Leverhulme Centre for Research on Globalisation and Economic Policy at the University of Nottingham; her email address is yundan.gong{at}nottingham.ac.uk. Holger Görg (corresponding author) is a professor of international economics at Christian-Albrechts-Universität and Institut für Weltwirtschaft, in Kiel, Germany, and an external fellow at the Leverhulme Centre for Research on Globalisation and Economic Policy at the University of Nottingham; his email address is holger.goerg{at}ifw-kiel.de. The authors are grateful to three anonymous referees and the journal editor for helpful comments on an earlier draft. Financial support from the Leverhulme Trust (Programme Grant F114/BF) and the Economic and Social Research Council under its National and International Aspects of Financial Development program is gratefully acknowledged.


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