The knowledge spillover effects of FDI on the productivity and efficiency of research activities in China

- This paper offers new insights for policymakers to optimize the effectiveness of investment performance.
- We focus on the spillover-induced productivity and efficiency change at the regional level.
- Highly skewed distribution of FDI leads to a decline in innovation efficiency in FDI-rich provinces.
- Inter-provincial governmental cooperation is needed to resolve the uneven distribution of FDI and improve innovation efficiency.

As China is moving toward an innovation-driven economy, this paper offers new insights for both policymakers and investors to optimize the effectiveness of investment performance. This paper studies China's provincial research activities with a focus on the spillover-induced productivity and efficiency change. The results show that spillovers as a result of inflow of foreign investment contribute positively to the performance of overall research activities, however, the productivity effects vary across regions. Our analysis also indicates that highly skewed distribution of FDI leads to a less improved innovation efficiency in FDI-rich provinces. Future innovation policy should adjust the investment profiles based on the preferential innovation output on one hand, and optimize the complementary policy for FDI on the other hand to reduce inefficiency and the potential negative effects of knowledge spillovers. Inter-provincial governmental cooperation is necessary to resolve the uneven distribution of FDI and improve the innovation efficiency in both FDI-poor and rich regions.