Foreign direct investment and technology spillover in Iran: The role of technological Capabilities of subsidiaries Ali Salim a, ⁎, Mohammad Reza Razavi a , Masoud Afshari-Mofrad b a Islamic Azad University, Science & Research Branch, Tehran, Iran b Department of Information Technology Management, Tarbiat Modares University, Tehran, Iran abstract article info Article history: Received 17 May 2015 Received in revised form 31 August 2015 Accepted 1 September 2015 Available online xxxx Keywords: Foreign direct investment (FDI) Technological capabilities Technology spillover channels Iran Foreign direct investment (FDI) plays a significant role in global business by providing new markets and market- ing channels, cheaper resources, access to new technologies, products, skills and financing. One of the most important aspects of FDI for a host country is technology spillover trough which domestic firms gain access to new technologies from international enterprises. Iran, as a developing country, has had some form of engagement with foreign capital for more than 150 years. Nevertheless, there are limited studies on the role of FDI in technology spillover in Iran. This study investigates the effect of technological capabilities of foreign subsidiaries on the relation- ship between FDI and technology spillover channels including Demonstration effect, Training effect, Collaboration effect, Linkage effect and Worker turnover. A questionnaire was completed by 100 subsidiary units based in Iran. The sample consists of all foreign subsidiaries active in different industry or service sections all over the country. The results of running logistic regression model on data from questionnaires showed that FDI could not affect spillover channels directly. Yet, the results proved that technological capabilities of subsidiary units, as mediating players, have a positive influence on two spillover channels namely Demonstration effect and Training effect. © 2015 Elsevier Inc. All rights reserved. 1. Introduction Attracting foreign direct investment (FDI) has become an essential part of development strategies among developing countries and many researchers have tried to investigate FDI impacts on the host economy. Most of these studies can be divided into two main categories: direct approach and indirect approach. In direct approach, researchers have mostly concentrated on economic issues of FDI such as financial resources, capital formation, and tax relief. In indirect approach, studies often focus on the interaction between foreign enterprises and host national innovation system (NIS) in terms of technology transfer and capability building, technology spillover, human resource development, monetary externalities and so on (Lall and Narula, 2004). These studies claim that through spillover effect of FDI, host countries might be able to improve their technological capability, organizational efficiency and management skills and in some cases, start endogenous growth (Wei, 2000). Thus, it is vital for developing countries to identify the impacts of FDI on their economy in terms of technological capability building. Due to its unique geographical location at the cross roads connecting Asia and Europe, natural resources, large domestic market with a current population of more than 75 million, as well as easy access to neighboring markets with approximately 300 million inhabitants, Iran, as a developing country, hashad some form of engagement with foreign capital for more than 150 years. In recent decades, governments have tried to encourage foreign investors to invest in different sectors of economy by providing incentives such as tax relief, flexible employment regulations, and legal guarantees and protection. Iran's 5th five-year development plan (FYDP) suggests strategies to attract at least 30–40 billion dollars of foreign investment annually. Despite international sanctions and some complexities in operating requirements of investing in Iran, foreign investors are still active and they have concentrated their activity in a few sectors of the country especially oil and gas industry, vehicle manufacturing, petrochemicals and so on. According to FDI data from Organization for Investment Economic and Technical Assis- tance of Iran, Fig. 1 depicts the amount of FDI in Iran over the period of 1994–2011. In spite of the long history of FDI in the country and government efforts to attract foreign investment, there are few studies on the role of FDI in technology spillover in Iran. To overcome this shortcoming, in this study the effect of foreign direct investment on technology spill- over, considering the role of technological capabilities of subsidiary units, is investigated. Technological capabilities of subsidiary units are divided into five main categories including: production capability, maintenance capability, adoption capability, process improvement capability and new product development capability (Lall, 1992; UNIDO, 2003). Also, five technology spillover channels are recognized including Demonstration effect, Training effect, Collaboration effect, Linkage effect and Worker turnover (Blomstrom and Kokko, 1997; Murillo, 2002). Technological Forecasting & Social Change xxx (2015) xxx–xxx ⁎ Corresponding author. E-mail address: salim.ali13@gmail.com (A. Salim). TFS-18321; No of Pages 8 http://dx.doi.org/10.1016/j.techfore.2015.09.012 0040-1625/© 2015 Elsevier Inc. All rights reserved. Contents lists available at ScienceDirect Technological Forecasting & Social Change Please cite this article as: Salim, A., et al., Foreign direct investment and technology spillover in Iran: The role of technological Capabilities of subsidiaries, Technol. Forecast. Soc. Change (2015), http://dx.doi.org/10.1016/j.techfore.2015.09.012