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| Abstract: This paper analyzes the impact of capital inflow with superior technology on the exports and employment of a typical developing economy. A simple duopoly competition between asymmetric domestic firms (one with domestic technology and another with foreign technology) reveals that the efficiency gain of a domestic firm depends on absorption capability (depending on research and development (R&D), skills acquisition, etc.) and the efficiency gain can raise the level of exports but not necessarily the employment. In the empirical exercise, we first estimate technical efficiency using the endogeneity-corrected stochastic frontier analysis (SFA) technique applied to cross-sectional firm-level World Bank Enterprise Survey data for India and China. The results show that firms undertaking R&D expenditure absorb foreign technology better, enhancing their technical efficiencies. Finally, the results of the 3SLS model applied to analyze the impact of technical efficiency on exports and employment show that technical efficiency significantly and positively determines exports and employment in China. However, exports only in India due to lower absorbability. |