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Chinese scientists and economists have provided compelling new evidence that foreign direct investment in the digital economy (DFDI) significantly boosts innovation among domestic firms. According to a study published in The World Economy, this effect is most pronounced in expanding the technical and geographical scope of innovation—what researchers call “extensive innovation”—rather than deepening existing technologies. The findings, based on data from the Global Greenfield Investment Database and firm-level analysis, reveal that DFDI extends the optimal technological innovation boundary of Chinese companies by broadening technology spillovers and R&D synergies. This effect is particularly strong among firms with greater absorptive capacity, as measured by digital intangible assets, and those with a smaller gap from frontier technologies. The study also highlights that firms located in regions with higher levels of marketization benefit more substantially, underscoring the interplay between institutional environment and global capital flows.
The strategic significance of this research is twofold. First, it challenges a narrow view that foreign investment merely transfers existing technologies. Instead, DFDI actively reshapes the innovation landscape by encouraging firms to explore entirely new technological domains. Second, the finding that absorptive capacity is critical suggests targeted policies—such as investments in digital infrastructure and skills training—can amplify the innovation benefits of foreign capital. For global businesses and investors, the message is clear: China’s digital economy is not just a market for deployment but a dynamic ecosystem where foreign participation can drive genuine technological expansion.
Why it matters:
For multinational corporations and investors, this study provides a data-driven rationale for viewing China’s digital economy as a collaborative innovation partner rather than merely a competitive threat. For Chinese policymakers, it reinforces the case for maintaining openness to foreign digital investment while building domestic absorptive capacity to maximize spillover benefits.
As the global digital economy reshapes competitive dynamics, this research suggests that China’s innovation trajectory is not self-contained: it is increasingly shaped by—and accessible to—international partners who engage strategically with the country’s firms.
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