The role of regional formal institutions and foreign direct investment in innovation in Chinese enterprises

Abstract

China features high degrees of income inequality, regional disparity and regional institutional diversity. With disparities in institutional development across regions, Chinese firms tend to have different levels of innovation as the costs, risks, efficiency and incentives of firms in innovation are affected by the regional institutional building. This article investigates the role of regional formal institutions in the innovation process in Chinese enterprises. It suggests that regional formal institutions (reflected by government support), financial institutions, educational institutions and taxation institutions promote innovation in Chinese firms, while they fail to discover such an impact from legal institutions. Also, regional formal institutions positively moderate Foreign Direct Investment (FDI) spillovers on process innovation.

Keywords:

• China
• FDI spillover effects
• innovation
• manufacturing firms
• moderation effects
• regional formal institutions

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Corrigendum

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. According to Company Law and Securities Law in China, a foreign-invested firm involves at least 25% of total shares coming from foreign investors.

2. This is because all three variables are ordered variables, with a higher ordered value meaning higher performance in innovation.