In India, the backward linkage is the most efficient channel of technology spillovers from multinational enterprises. Although MNEs brought their subcontractors from their home countries during the 1980s, they started procurement from local suppliers to meet the targets of local content. Local suppliers accumulated relationspecific skills through subcontracting. As the domestic demand expanded rapidly in the 1990s, production volume exceeded the level required for subcontractors to secure economies of scale. More foreign assemblers and component manufacturers entered the Indian market. Strengthened competition encouraged foreign and local assemblers to improve supply chain management. The econometric estimation in this paper finds a significant and positive correlation between improvement of labour productivity of suppliers and total factor productivity growth rates in six machinery industries. The result of the estimation confirms the effects of backward linkage. Rapid expansion of domestic demand and competition are determinant factors of development of subcontracting. But the range of subcontracting is limited to a part of the organised sector.