I've been living in Japan for 15 years. In fact, that method is called "Indian multiplication method" in Japan. Though I don't know whether or not it actually came from India, many people believe so because they usually regard Indians as mathematically talented people. This method is not so common in Japan, yet some cramming schools teach this method for elementary school students. The following link shows another method of multiplication taught in some Japanese cramming schools.
2) How did they find this "at-most $2n^2$" operations?
Lets consider the final addition part.
For final addition, we are basically adding 4 numbers (results of multiplication by each digit). We can represent them like below (dashes and blank spaces replaced by 0's)
r1:0022712
r2:0170340
r3:1135600
r4:5678000
Now addition of $r_1$ and $r_2$ takes 7 basic opeartions.
Similarly addition of result of $(r_1+r_2)$ and $r_3$ takes 7 basic operations.
Similarly addition of result of $(r_1+r_2+r_3)$ and $r_4$ takes 7 basic operations.
A total of 21 operations for final addition. Here we are multiplying two small numbers.
But if we would have multiplied $9999 \cdot 9999$ then final addition would be of 24 operations, i.e. $$
r_1 - 00089991 + r_2 - 00899910 + r_3 - 08999100 + r_4 - 89991000
$$
24 operations $= 2 n^2 - 2 n$ with $n = 4$ in our case.
(24 operations without considering carry overs. I am not sure if carry overs were also counted as additional opeartions by Tim Roughgarden)
Best Answer
According to Wikipedia, "It is not known where it arose first, nor whether it developed independently within more than one region of the world".
http://en.wikipedia.org/wiki/Lattice_multiplication