Humanities & Social Sciences Reviews eISSN: 2395-6518, Vol 8, No 2, 2020, pp 708-714 https://doi.org/10.18510/hssr.2020.8279 708 |www.hssr.in © Thai Ha et al. THE IMPACT OF INNOVATION ON ECONOMIC GROWTH: THE SPILLOVER EFFECT OF FOREIGN DIRECT INVESTMENT Nguyen Tran Thai Ha 1* , Sobar M. Johari 2 , Trinh Thi Huyen Thuong 3 , Nguyen Thi Minh Phuong 4 , Le Thi Hong Anh 5 1,3 Faculty of Finance and Accounting, Saigon University, Ho Chi Minh City, Vietnam; 2 Department of Syariah Economics, Universitas Muhammadiyah Yogyakarta, Indonesia; 4 Economics Department, Vinh University, Vietnam; 5 Military Commercial Joint Stock Bank – Thong Nhat Branch, Vietnam. Email: 1* nguyen.tranthaiha@sgu.edu.vn, 2 sobarjohari83@gmail.com, 3 tththuong@sgu.edu.vn, 4 phuongntm@vinhuni.edu.vn, 5 lethihonganhvn@gmail.com Article History: Received on 23 rd March 2020, Revised on 11 th April 2020, Published on 29 th April 2020 Abstract Purpose of the study: Innovation is seen as the key to improving quality and productivity, thereby promoting competition and economic growth. This study analyzes the impact of innovation on economic growth through various measures, such as research and development spending, the number of researchers, number of patents as well as trademark registrations. Research results are evidence to recommend policies for intellectual-based economic growth. Methodology: Literature review and empirical analysis conducted in the study. The empirical method is a two-step System Generalize Methods of Moments (GMM), aiming at reliable results. Accessing the World Bank Database, research data from 64 developed and developing countries are collected from 2006 to 2014. Main Findings: The empirical findings show that innovation plays a crucial contribution in promoting economic growth, similar to national openness and government spending on education. This study also finds a positive impact on foreign investment flows and their spillover role in enhancing the correlation between innovation and economic growth. Applications of this study: The findings of this study focus on the contributions of innovation, foreign direct investment inflows, and other macro factors that can be enforced to improve economic growth by policymakers. Novelty/Originality of this study: The study uses different measures of innovation, including inputs such as the number of researchers, research and development expenditure, and outputs as the number of patents and number of trademark registrations. Empirical findings are found consistently, thus confirming that innovation is very important for economic growth. The study also shows convincing evidence confirming the positive contribution of foreign direct investment as well as its spillover effect on innovation and economic growth. Keywords: Innovation, Economic Growth, Spillover Effect, FDI, Generalize Methods of Moments. INTRODUCTION Studies in the economics line always revolve around the topic of economic growth, which is always attractive to both practical and academic scholars. Gross national product (GDP) or gross national product per capita (GDPCAP) is often regarded as an indicator of economic growth and is the main goal of each country (Quah, 2001 ); and they can be driven by (1) increasing the number of physical inputs that they use in the manufacturing process such as capital and labor to boost the capacity of production; (2) enhancing productivity through the innovation process, such as creating or improving products or production processes to boost productivity or produce new products for the market. In recent years, innovation is assessed as the potential key to open the road for economic growth, compared with the limitation of physical inputs. Romer (1986) emphasized the important role of knowledge as a non-competitive commodity in his endogenous growth model. He argued that the dissemination of knowledge would create a positive externality to promote the creation of new products, improve old products, and increase productivity. Similarly, Grossman and Helpman (1994) believed that the development of knowledge and innovation was seen as a crucial player in long-term economic growth. Initiatives, therefore, replaced obsolete products and technologies, acting as an incentive on market competitiveness, thereby supporting economic development (Aghion et al., 2010 ) and ensured the sustainable growth of the economy (Pece et al., 2015 ). In addition, the inflow of foreign direct investment (FDI) is considered to be the factor bringing about the spread in innovation activities. For example, China, India, Malaysia, Singapore, and South Korea have successfully transitioned from technology importers to technology exporters. This is closely related to their absorption of knowledge and technology from FDI inflows to create high-tech and high value-added goods, and they become technological exporters. FDIs bring not only financial capital but also technological know-how and management expertise, which result in the spreading innovation (Erdal & Göçer, 2015 ). This effect is called the spillover effect, in which FDI inflows can be converted into productivity increases, thus escalating economic growth ( Grossman & Helpman, 1991 ; Barro & Xavier, 1995 ).