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

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. © 2018 Elsevier Inc.