Academic journal article The International Journal of Business and Finance Research

Impact of Inward Fdi, Import on Domestic Innovation: Evidence from China

Academic journal article The International Journal of Business and Finance Research

Impact of Inward Fdi, Import on Domestic Innovation: Evidence from China

Article excerpt

ABSTRACT

Hastened by triangle trade patterns, exchange of immediate goods and inward foreign direct investment have become the main channels to achieve technical spillover. Based on regional inward capital data and classified traded goods, we examine causes of innovation in the context of inward foreign direct investment. We find that local absorptive capacity critically affects creative power. Economies transfer techniques using various approaches, impacting local innovation in diversity. A low degree of industrial-correlation hampers knowledge spillage through foreign direct investment in high-tech industries. Existing technology stocks satisfy technical wants for imported parts rather than imported capital goods. This makes it difficult to digest or absorb spillovers from the latter. China benefits substantially from technical spillovers of imported parts mostly from Asian economies. Governments should support research and develop machinery and equipment industries to accumulate know-how. China should proportionately import parts from European countries and USA to realize trade balance and reduce trade conflicts.

JEL: D24, F14, F23, 033

KEY WORDS: New Triangle Trade Pattern, Knowledge Spillover, Absorptive Capacity

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Technological progress drives economies. In the early 1900s, ninety percent of the doubled efficiency in the USA come from technology progress and 10% from capital increment (Solow,1957). Three technology progressive patterns receive the most academic attention. Anglo-Americans fundamentally rely on basic research and independent innovation. South Korea focuses on introducing, digesting and absorbing overseas advanced technology and innovating afresh. Asians attract foreign direct investment (FDI) to narrow the technical gap with developed countries. Developing countries try to absorb technical spillover through trade and inward FDI with the aim to quickly cultivate and create need for independent research and development.

Since 1990s, China adopted a cascading-tariff policy by exerting low or exempted tariffs for imported parts to stimulate processing and promote export-oriented industries. Fostered by new-triangle trade, resulting from division of production and processing, inward FDI and intra industrial trade developed quickly in China. Newly industrialized Asian economies such as Japan, South Korea, Taiwan, Singapore, and Hong Kong transplanted their labor-intensive industry to less-developed Asian economies. They export capital goods and intermediate products to those zones having a comparable advantage and re export final products to European countries and the United States. By 2008, from the core position of "triangle trade", China became the world's top exporter of mechanical and electronic products.

High technical industries have three characteristics. First, mainly importing high-tech products from newly industrialized Asian economies and exporting to European countries and the United States. In 2008, over sixty percent of hi-tech products were traded by Asian economies, especially with Taiwan (17.14%), South Korea (15.3%) and Japan (13.56%). Of the export products, 42.32 percent are exported to Europe and America and nearly 23.45 percent transit at Hong Kong. Second, large contributions come from immediate-products trade. Of the traded high-tech commodities, parts represent 52 percent for imports and 48%) for exports, whereas 68 percent of imported immediate goods are for processing rather than for domestic sale (Gaulier et.al.,2007).

Properties of New triangle trade suggest we should distinguish sources of investment and trade type to analyze their effect on indigenous innovation. Because different investment bodies have different roles in trade, a single study of the impact of export or FDI on indigenous innovation and technical progress might lead to incorrect conclusions. Based on the New Triangle Trade Mode, this study explores two paths of technology spillover on innovation in the context of technical trade and FDI. …

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