The purpose of this paper is to explore whether the firms’ internationalization and innovative activities are mutual causality. Innovative activities and foreign direct investment (FDI) both belong to business investment activities. Firms’ FDI can help to develop innovative capabilities which are firm-specific advantages and promote firms’ overseas investments. Furthermore, we examine the impact of FDI on firm performance. Using a sample of Taiwanese listed firms, we find that there is a positive mutual association between FDI and innovative activities for parent firms. We also find that FDI has a positive effect on firm performance; and the higher innovative capabilities enhance the return attributable to FDI. In addition, we find that parent firms’ FDI in china tend to attain a lower innovation development and a higher financial performance than those in developed countries. This suggests that firms primarily aim at market-seeking and labor-seeking in China and strategic-asset seeking in developed countries.
