The impact of foreign direct investment on innovation: Evidence from patent filings and citations in China

•This paper studies how foreign direct investment (FDI) affects innovation in the host country, using matched firm-level patent data of Chinese firms which provides detailed information about patent counts and citations.•By exploiting the plausibly exogenous relaxation of FDI regulations upon China’ WTO accession at the end of 2001, our empirical analysis shows that FDI has positive intraindustry effects on both the quantity and quality of innovation, as well as radical innovation, by Chinese firms.•We show that these positive effects are driven by increases in competition, rather than by knowledge spillovers from FDI which is measured by patent citations between domestic firms and foreign invested enterprises (FIEs).•We further investigate the inter-industry effects of FDI and find that FDI has positive vertical effects on innovation in upstream sectors through the backward knowledge spillovers.