Innovation Under the Threat of FDI: A Study of Indian Firms

Innovation is widely accepted as primary driver of economic growth in most of the developed as well as developing parts of the world. Recently, countries are more planned to achieve innovation-based competitiveness as it directly impacts productivity and enhances the immune to any form of economic turbulence and crisis. Along with that, an inflow of FDI enhances the knowledge spillover process via more R & D and expected to induce innovation for the local firms at a faster rate. With this in mind, the paper explores the impact of FDI on innovative performance of two giant Indian industries namely textile and chemical. Using a panel data technique for 9584 firms over a span of 15 years, the paper found a negative impact of inflow of FDI on innovation. Such findings further suggest that foreign entrants do not rely in Indian associates for innovation rather they rely on their country of origin or parent firm for the same. Our findings further indicate that inflow of FDI may not be the best source of knowledge spillover for Indian firms.