The impact of foreign direct investment on innovation in China's forest products industry

Abstract

The forestry industry, with its high resource dependence, long production cycles, and extensive development modes, lags behind other industries in terms of innovation. This study examines the impact of foreign direct investment (FDI) on product innovation in China's forest products industry. We use data from 146,526 forest products enterprises spanning the years 1998 to 2013, merged with patent application records from the China National Patent Database, and employ a two-way fixed effects model. Our estimates show that a 10 % increase in FDI is associated with a 0.86 % increase in patent applications, a smaller effect than in other industries. In particular, we examine how this positive effect of FDI on innovation is affected by the specific production and layout features of the forest products industry. We find that this effect is greater in regions rich in forest resources and non-coastal areas. Additionally, enterprises in this industry often focus on strategic innovations, such as product design, rather than substantial technological change, with innovation priorities differing across sub-sectors. Mechanism analyses reveal that FDI promotes innovation in forest products enterprises by increasing R&D investments, optimizing the marketing environment, and alleviating financial constraints. Extended analyses indicate significant spillover effects of FDI-driven innovation across the industry, especially between the upstream and downstream segments of the supply chain. We advise the global forest products industry to consider these unique production and layout features in their development strategies, and suggest a reorientation of government innovation policies toward long-term goals.