Technology Diffusion through Foreign Direct Investment

This study examines technology diffusion resulting from foreign direct investment in the domestic manufacturing sector in India, by employing unit-level panel data from 2000 to 2007, covering all medium- and large-size manufacturing enterprises. The attempt is to empirically capture evidence of FDI technology spillover effects through two key mechanisms: horizontal spillover and vertical spillover. Vertical spillover effects can be further divided into backward linkages and forward linkages. Technology diffusion can also be the result of both short- and long-term spillover effects.

The authors are grateful for the financial support from JSPS KAKENHI Grant Number 17H01652.

The innovation and diffusion of technology is crucial for economic growth in developing countries. A key source of technology diffusion is through spillovers from foreign direct investment (FDI). FDI spillovers resulted in rapid economic growth in East Asian countries in the late 20th century, referred to as the East Asian Miracle (World Bank 1993). Several empirical studies have demonstrated the presence and effects of FDI spillovers by analysing aggregate industry-level data (for example, Blomström and Persson 1983; Blomström 1986; Kokko 1994, 1996) and firm-level data (for example, Javorcik 2004; Blalock and Gretler 2008; Javorcik and Spatareanu 2008, 2011; Liu 2008). However, some empirical studies have not found significant FDI spillover effects, such as Akinlo’s (2004) aggregate industry-level and firm-level analyses by Haddad and Harrison (1993), Aitken and Harrison (1999), and Bosco (2001).

Considering these divergent findings, we examine FDI spillover effects in the manufacturing sector in India. FDI increased significantly in India after the 1991 Indian economic crisis and subsequent economic reform supported by an International Monetary Fund (IMF) stabilisation programme. India became an attractive FDI destination due to its large labour force, low production costs, and high technological innovation potential. India attracted substantial FDI inflow following this period of reform, and this inflow of FDI was a key factor in India’s rapid economic recovery and growth (National Council of Applied Economic Research 2009).