FDI spillovers, innovation and the role of industrial clusters: Evidence from innovative Indian manufacturing firms

Pompi Chetia, Smruti Ranjan Behera, Tapas Mishra and Mamta Parhi

Economic Modelling, 2025, vol. 152, issue C

Abstract: This paper studies the impacts of horizontal and vertical foreign direct investment (FDI) spillovers on innovation activities of Indian manufacturing firms by comparing effects within major industrial clusters with those outside. We find that a great breadth of innovations arises via horizontal linkages among firms within the industrial clusters. Conversely, firms outside industrial clusters do not portend measurable innovation effects from FDI spillovers. Our results highlight the crucial role of geographical proximity in harnessing innovation spillovers, further emphasizing the need for tailored policies for firms outside major industrial clusters to maximize their innovation potential. A Difference-in-Differences estimation to gauge the effect of the 2014 FDI liberalization policy on firms’ innovation output shows that foreign firms have significantly increased their innovation activities relative to domestic firms post-2014 FDI liberalization policy.

Keywords: Innovation; FDI; Industrial cluster; Horizontal spillover; Vertical spillover (search for similar items in EconPapers)
JEL-codes: D62 F3 O32 R1 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:152:y:2025:i:c:s0264999325002354

DOI: 10.1016/j.econmod.2025.107240

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