Does the presence of Multinational Corporations (MNCs) boost domestic firms’ productivity automatically? Or whether the domestic firms’ absorptive capacity is necessary to generate positive spillovers from FDI firms? In this study, we examine FDI spillover effects while considering domestic firms’ absorptive capacity. For this purpose, we consider two measures of absorptive capacity (AC) - Technology Gap and Research & Development (R&D) stock. Using a representative firm-level balanced panel dataset of Indian manufacturing consisting of 14,553 firm-year observations across 1,617 firms, we investigate both the linear and non-linear relation between AC and spillovers across all manufacturing industries and a sub-sample of firms belonging to high-tech and low-tech sectors. Our finding underscores the significance of non-linearities and threshold effects to better understand the role of absorptive capacity on the productivity of domestic firms. Results obtained from technology gap and R&D-specific models stress that adequate absorptive capacity is crucial for a positive incidence of spillovers. Further, findings of this study show how the relationship between absorptive capacity and FDI spillover varies across channels and various measures. As a third objective of this thesis, we explore the nature of foreign subsidiaries by separating the MNCs as Knowledge Creators and Knowledge Users based on their innovation-oriented activities. The findings clearly highlight the heterogeneous nature of foreign firms in the incidence of spillover, where we find that Knowledge Creators generate positive backward-vertical spillover. At the same time, Knowledge Users produce significant positive horizontal spillovers. Therefore, the study concludes that FDI spillover effects are shaped by the evolving nature of subsidiaries within the innovation network of an MNC.