Country origin of foreign direct investment in indian manufacturing and its impact on productivity of domestic firms

Abstract

The productivity-enhancing effects of foreign direct investment (FDI) in Indian manufacturing firms are analysed in this paper, focusing particularly on the question, whether the country of origin of FDI makes a difference. Data on about 7000 manufacturing companies drawn from Prowess (CMIE) covering the period from 2000-01 to 2014-15 are used for the analysis. A distinction is made between FDI from developed countries and that from developing countries, and between FDI from USA/Europe and that from Asian countries. The results of the study indicate a positive effect of FDI on firm total factor productivity (TFP). The impact of FDI on TFP of the acquired firm is relatively bigger for FDI from developed countries particularly from USA/Europe. Evidence of a positive FDI productivity spillover to domestic firms is found; there are indications of horizontal spillover and forward linkage vertical spillover. The beneficial horizontal productivity spillover effects of FDI on domestic firms are found to be stronger when the FDI is from developed countries than when it is from developing countries, and when the FDI is from USA/Europe than when it is from countries of Asia. As regards forward linkage vertical spillover, FDI from Asian countries seems to be relatively more beneficial.