A firm-level analysis of the impact of foreign direct investment in research and development on the innovation output of Indian firms

Abstract

Using the firm-level data, this paper investigates the impact of Foreign Direct Investment in Research and Development (FDI-R&D) on firms' innovation output in the Indian context during 2010–2020. We hypothesize that foreign investment brings intangible knowledge about the recent technological advancements, international scientific practices, and working culture of global laboratories to domestic firms and thus improves the innovation performance of such firms. The major challenge in conducting the empirical studies is the selection problem as productive efficient host country firms are likely to attract foreign investments. Hence, we employ Propensity Score Matching (PSM) and Difference in Differences (DID) to capture the influence of foreign investment on innovation output namely patents. After controlling the selection problem, we find that firms with FDI-R&D patent more than the non-FDI-R&D firms. © 2025 The Authors