The Impact of Foreign Direct Investment on Innovation in India: An Analytical Study

This study explores the intricate relationship between Foreign Direct Investment (FDI) inflows and innovation in India, particularly during the post-liberalization period from 1991 to 2021. It critically examines theoretical perspectives and empirical trends to assess how FDI has influenced domestic innovation capabilities, as measured through indicators such as patent applications and gross expenditure on R&D (GERD). Drawing on a broad spectrum of economic theories—from early work by Kindleberger and Vernon to Dunning’s eclectic paradigm—the paper evaluates the dualistic nature of FDI: as a vehicle for advanced technology transfer and as a potential source of dependency. India’s FDI inflows dramatically increased following economic reforms and a rise in patent filings, even though R&D intensity relative to GDP stagnated. The findings underscore that while FDI has positively contributed to innovation output, structural limitations such as inadequate absorptive capacity and inconsistent R&D investment hinder the full realization of FDI’s innovation potential. The paper calls for more cohesive policy frameworks to align FDI with sustainable and inclusive innovation-driven growth.