FDI spillover effects on innovation activities of knowledge using and knowledge creating firms: Evidence from an emerging economy

The beneficial effects of innovation for firm performance and competitiveness are well established but it has been suggested in recent years that innovation regimes differ between advanced and emerging economies. While advanced economies rely on knowledge generation, their emerging counterparts follow mainly knowledge use regime through the application of existing knowledge and technology. Climbing up the technological ladder can be helped through spillovers from foreign investors to local firms. We investigate whether FDI spillovers influence different phases of innovation process (from decision to innovate to productivity) among knowledge using and knowledge creating firms in an emerging European economy. The results show that innovation process in emerging economies is closer to imitation than creation of novel products. Local firms benefit from foreign counterparts in the early phase of innovation process. Stronger FDI effects are found on firms that undertake innovation through knowledge use than through knowledge generation. • Impact of FDI spillovers on innovation activities in emerging economy is explored. • We distinguish between knowledge using and knowledge creating firms. • Innovation process is closer to imitation than creation of novel products. • Domestic firms benefit from FDI in early phase of innovation process. • Stronger FDI effects are found on knowledge using than knowledge creating firms.