<scp>FDI</scp> and Firm Innovation in the Digital Economy: Evidence From China

ABSTRACT This paper focuses on the impact of the digital foreign direct investment (DFDI) on firm innovation and its underlying mechanisms. Specifically, based on the Global Greenfield Investment Database provided by fDi Markets, and after constructing DFDI variables at the city‐industry level, this paper conducts empirical research and finds that: (1) Baseline analysis results show that DFDI significantly enhances the innovation level of firms. Furthermore, an analysis of the extensive margin (extensive innovation) and the intensive margin (intensive innovation) of firms in innovation technology fields shows that DFDI primarily promotes extensive innovation while having no significant effect on intensive innovation. (2) Mechanism analysis results show that DFDI promotes extensive innovation by expanding the technical scope and geographical scope of technology spillovers and R&amp;D synergies, which expands firms' optimal technological innovation boundary. In addition, using the proportion of digital intangible assets to measure firms' absorptive capacity, we find that the innovation effect of DFDI is more significant in firms with greater absorptive capacity. (3) Heterogeneity analysis results show that DFDI has a more significant promoting effect on firm innovation among firms with relatively small gaps from frontier technologies and firms located in regions with higher levels of marketization.