RIEB Discussion Paper Series No.2020-13

RIEB Discussion Paper Series No.2020-13


Technology Diffusion through Foreign Direct Investment: A Unit-Level Analysis of the Indian Manufacturing Industry


This study examines technology diffusion resulting from foreign direct investment (FDI) in the domestic manufacturing sector in India. We employ unit-level panel data (where a unit refers to an enterprise within the manufacturing sector) from 2000 to 2007, covering all medium- and large-size manufacturing enterprises in India, obtained from India's Central Statistics Office. We attempt to empirically capture evidence of FDI technology spillover effects through two key mechanisms: horizontal spillover (technology diffusion within the same industry) and vertical spillover (technology diffusion between foreign firms and their customer or suppliers). Vertical spillover effects can be further divided into backward linkages (technology diffusion from foreign firms to upstream industries), and forward linkages (technology diffusion from foreign firms to downstream industries). In addition, technology diffusion can be the result of both short- and long-term spillover effects. The results of the empirical analyses highlight the presence of short- and long-term horizontal spillover effects, both of which negatively affect the total factor productivity performance of domestic manufacturers. Moreover, we find an inverse relationship between the growth of FDI and total factor productivity in upstream industries in the short term; however, this changes to a positive relationship in the long term. Furthermore, the results show no evidence of FDI spillover effects to downstream sectors.


Technology diffusion; Foreign direct investment; Total factor productivity; Backward spillover effect; Manufacturing industries; Unit-Level data

JEL Classification

C81, F21, O53


Department of Management, Osaka Seikei University

Department of Economics, Aichi Gakuin University

Takahiro SATO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059