Do foreign institutional investors enhance firm innovation in China?

ABSTRACT

This paper investigates the impact of the Qualified Foreign Institutional Investor (QFII) scheme regulated by the Chinese government on firm innovation in China. By explicitly addressing the potential endogenous relationship between foreign institutional ownership and firm innovation, we find that foreign institutional investors enhance firm innovation in China, suggesting that the Chinese government should further relax its foreign capital investment control, for example, increase the quota of the QFII scheme.

KEYWORDS:

• Innovation
• patent
• foreign institutional investors
• instrumental variable

JEL CLASSIFICATION:

• O31
• G30

Acknowledgments

The first author gratefully acknowledges financial support from University of Macau. The authors appreciate Yanzhi (Andrew) Wang for his suggestions to improve this paper. The authors thank Qing Liang for excellent research assistance and Eric Scott for copy editing service.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Based on the report of World Intellectual Property Organization (WIPO), the total number of patent applications in China has experienced a remarkable surge, growing from 526,412 in 2011 to 1,101,864 in 2015, surpassing U.S. patent applications in 2011. This provides an optimistic prospect of long-term

growth of the Chinese economy.

² Over 13 years, QFIIs’ investment quota has risen rapidly from 1.7 billion USD in 2003 to 81.1 billion USD in 2015.

³ We also use patent stock data as a robustness test. The results are consistent with our main result. These results are available upon request.

⁴ To avoid losing firm-year observations with zero patents, we add one to the actual patent values before taking the natural logarithm.

⁵ The variables included in our estimations are not highly correlated. To save space, we do not report the correlation matrix here. It is available upon request.

⁶ Patent data have a truncation issue – there is a significant lag between patent applications and patent grants. We address the truncation issue in two ways. First, we add year fixed effects. Second, we truncated the sample two years before the sample ending year (i.e. 2014). The results for the truncated sample are qualitatively the same as our main results. They are available upon request.

⁷ CSI 800 is developed by China Securities Index Co., Ltd, co-founded by Shanghai and Shenzhen stock exchanges.

Additional information

Funding

This work was supported by the University of Macau under Grant MYRG2015-0151-FBA.