FDI, Environmental Regulation, Innovation Performance of China's Enterprises: Moderating Effect of Urbanization

Innovation in the process of new-type urbanization is a major strategic choice for the inflows of foreign capital and economic development. Based on Chinese Industrial Statistics Database of 2004-2007 and data at province-level, this research investigates the effect of urbanization, FDI and environmental regulation on enterprises' innovation performance. It is found that the FDI from U.S. and environmental regulation will hinder the creativity of Chinese industry by the decrease of R&D. However, the FDI from U.S. enhances the domestic enterprises' ability to attain compensation from innovation following the environmental regulation. Meanwhile, we confirm that environmental regulation can contribute to the innovation spillover of FDI from the United States. In addition, the effects of FDI from EU and Japan are further examined. Unlike the FDI from U.S., the FDI from EU and Japan both have the positive innovation spillover effect but through the same way as the former. Further analysis based on "innovation-driven effect" of urbanization is developed, and we find that urbanization has innovation-driven effect on environmental regulation and FDI's innovation spillover. The moderating effects of FDI from the United States and the European Union outperform that from Japan at a restrained degree. This research is developed from the dimension of urbanization, FDI, environmental regulation and innovation performance, investigating the role of FDI in environmental regulation, environmental regulation in FDI, their relations with innovation performance, and also the effects of urbanization, aiming at demonstrating innovation, innovation-driven and innovation-compensation effects of FDI and environmental regulation under the background of new urbanization. According to the empirical results, China is suggested to extend the channels of foreign investment, encourage environmental-friendly FDI, motivate enterprises to upgrade the core technology and facilities of energy conservation and environment protection, improve domestic enterprises' ability to handle with environment regulation, inspire technological entrepreneurship, thus to achieve the growth of national economy.