Spillover effect of FDI on China's knowledge creation

Purpose – The purpose of this paper is to examine if the knowledge spillover effect from foreign direct investment (FDI) inflow exists as well as its possible channels in China, and makes some policy suggestions. Design/methodology/approach – Based on the literature review, the paper sets a panel data model to empirically examine if the knowledge spillover effect of FDI inflow exists in China, using data from 28 manufacturing industries during 2001‐2005. Findings – The empirical results show that FDI played a positive role in China's knowledge creation and management in the sample period. At the same time, the demonstration effect and labor mobility effect served as the channels to yield beneficial results while the competition effect produced undesirable impact. However, the effect of these three channels on China's knowledge creation was very weak. Instead, the knowledge creation in China was still dependent on the input of R&D by domestic firms. Research limitations/implications – Owing to the data limitation, this paper only adopted data from large and medium enterprises to examine the spillover effect of FDI on the knowledge creation, and thus the conclusions may not be applicable to small enterprises. Originality/value – Most of the present studies only examined the existence of knowledge spillover effect, without investigating econometrically its channels. Using the latest industry‐level panel data, this paper examines both the existence of knowledge spillover and its main spillover channels empirically.