The impact of FDI policy changes and technology spillover on innovation performance among Chinese firms

This study examines whether the technological innovation performance of Chinese firms is driven by government Foreign Direct Investment (FDI) policies—specifically the Catalogue for the Guidance of Foreign Investment Industries—or by endogenous spillovers among domestic firms. Utilizing a Difference-in-Differences (DID) framework, we investigate the impact of China’s FDI policy and inter-firm knowledge spillovers on firm-level innovation outcomes. Our identification strategy compares a treatment group of firms in industries prioritized by the Catalogue against a control group of non-beneficiary firms. The findings reveal that the policy’s impact is highly significant during the high-growth period (2002–2011) but dissipates during the “New Normal” era (2012–2019). Conversely, inter-firm spillovers consistently and significantly bolster innovation across both periods. Furthermore, regional analysis indicates that policy effects are most pronounced in the economically developed eastern provinces. These results suggest that as the Chinese economy matures, endogenous knowledge diffusion increasingly surpasses direct policy intervention as the major driving force of technological progress.