Innovation has widely been regarded as one of the main drivers of economic growth in the knowledge economy. This paper investigates the impact of foreign direct investment (FDI) on the development of regional innovation capabilities in developing countries using a panel dataset from China. We find that FDI can contribute significantly to the overall regional innovation capacity. The strength of this positive effect depends, however, on the availability of the absorptive capacity and the presence of innovation-complementary assets in the host region. The increased regional innovation and technological capability may contribute further to regional economic growth. FDI contributes not only to the outputs of the regional innovation system, but also to the productivity of innovation in the developing countries. Policy implications are discussed.