This paper examines the effect of participation by foreign capital and the spillovers from a foreign presence on the technical progress of Spanish manufacturing firms. The results show that foreign direct investment (FDI) creates positive spillover effects for local firms, and when the presence of foreign capital and the absorptive capacity of spillovers from FDI are large, more technical progress ensues. Also, local companies in capital‐ and research and development (R&D)‐intensive industries experience larger positive FDI spillovers. For these reasons, government policies should aim to attract FDI, especially in the aforementioned industries.