Product sophistication and spillovers from foreign direct investment

What is it about?

FDI in developing countries is often associated with higher economic growth due to knowledge and technology spillovers to local firms. One way that FDI speed up growth is by facilitating the manufacturing of more sophisticated products by local firms. So far, there is a lack of firm-level evidence how the presence of multinational firms affects the product sophistication of firms in a developing country. This paper aims to fill this gap. We compile an extensive firm-product-level data set of Indian firms with information on product sophistication and spillovers from FDI in order to explore different channels through which spillovers from multinationals to local Indian firms foster the manufacturing of sophisticated products. We find that spillovers through supplier linkages strongly increase the manufacturing of sophisticated products in India.

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Why is it important?

Politicians give high priority to attracting FDI in developing countries. Our findings give policy advice in which industries attraction of FDI is most beneficial.