Connect Globally, Thrive Locally: The Spillover Effect of Sister-City Inward FDI on Regional Innovation

Sister cities are a prevalent form of subnational intergovernmental relationships. Such relationships can play an important role in attracting foreign direct investment (FDI). However, we know little about whether and how these relationships influence the localized impacts of FDI in host countries, which is pivotal in achieving the United Nation's Sustainable Development Goals. By integrating the literature on FDI spillover and sister cities, our study proposes that the higher the FDI percentage received by a city from its sister city, the greater the number of patents applied for by firms in that city. Our sample consists of 7273 inward FDI projects into China from 1558 cities in 77 countries between 2003 and 2008. The analysis results support our assumption. We also find that this positive effect is stronger when FDI projects are from recently established sister cities, when the asymmetry in the global economic networks of the two sister cities is smaller, and when regional marketization in host-country is higher.