We investigate whether inward foreign direct investment (FDI), either at the firm or industry level, has any impact on product innovation by Chinese state-owned enterprises (SOEs). We use a comprehensive firm-level panel data set of some 20,000 SOEs from 1999 to 2005. Our results show that foreign capital participation at the firm level is associated with higher innovative activity. Inward FDI in the sector, by contrast, has a negative effect on innovative activity in SOEs. However, there is a positive effect of sector-level FDI on SOEs that export, invest in human capital or undertake R&D.