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Does proximity to the frontier facilitate FDI-spawned spillovers on innovation and productivity?

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  • Khachoo, Qayoom
  • Sharma, Ruchi
  • Dhanora, Madan

Abstract

This paper is an endeavour to study the impact of foreign direct investment (FDI) on innovation and productivity of incumbents active in Indian manufacturing sector. We propose that the impact of FDI on innovation and productivity is not uniform but varies across incumbents. Depending on their location vis-a-vis the best practice frontier, incumbents near the frontier receive substantial benefits whereas those residing further down do not realise such benefits. The former have the potential to absorb the spillovers but latter, due to the lack of capability, are unable to assimilate the spillovers spawning from FDI. Employing the technique of data envelopment analysis (DEA) on a comprehensive firm-level dataset from 17-three-digit manufacturing industries, we compute the changes in total factor productivity (TFP) of incumbents and their proximity to the best practice frontier. Econometric analysis reveals that as opposed to incumbents located far away from the frontier, FDI spurs innovation and productivity in firms that reside close to the best practice frontier.

Suggested Citation

  • Khachoo, Qayoom & Sharma, Ruchi & Dhanora, Madan, 2018. "Does proximity to the frontier facilitate FDI-spawned spillovers on innovation and productivity?," Journal of Economics and Business, Elsevier, vol. 97(C), pages 39-49.
    • Handle: RePEc:eee:jebusi:v:97:y:2018:i:c:p:39-49
    DOI: 10.1016/j.jeconbus.2018.03.002
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    6. Reddy, Ketan & Sasidharan, Subash & Doytch, Nadia, 2022. "Outward foreign direct investment and domestic innovation efforts: Evidence from India," Journal of Economics and Business, Elsevier, vol. 122(C).
    7. Song, Wenfei & Han, Xianfeng, 2022. "The bilateral effects of foreign direct investment on green innovation efficiency: Evidence from 30 Chinese provinces," Energy, Elsevier, vol. 261(PB).
    8. Wang, Jun-Zhuo & Feng, Gen-Fu & Yin, Hua-Tang & Chang, Chun-Ping, 2023. "Toward sustainable development: Does the rising oil price stimulate innovation in climate change mitigation technologies?," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 569-583.
    9. Munther Al-Nimer & Salah Kayed & Rizwan Ullah & Najib Ullah Khan & Muhammad Sualeh Khattak, 2022. "Mapping the Research between Foreign Direct Investment and Environmental Concerns; Where Are We and Where to Go?," Sustainability, MDPI, vol. 14(24), pages 1-26, December.
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    11. Madan Dhanora & Ruchi Sharma & Walter G. Park, 2021. "Technological Innovations and Market Power: A Study of Indian Pharmaceutical Industry," Millennial Asia, , vol. 12(1), pages 5-34, April.

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