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Foreign Direct Investment and R&D: Substitutes or Complements--A Case of Indian Manufacturing after 1991 Reforms

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  • Sasidharan, Subash
  • Kathuria, Vinish

Abstract

Summary The entry of foreign firms in India since the reforms forces domestic firms to undertake R&D activities or import technology so as to compete with them. This study examines the relationship between FDI and R&D of the domestic firms in the post-liberalization regime. The study uses unbalanced panel data for 1,843 Indian manufacturing firms operating during the period 1994-2005 and corrects for the self-selection problem by using a Heckman-two step procedure. The analysis involving full sample does not give a clear picture of the impact of FDI on the innovation strategies of domestic firms. Interesting results emerge, when analysis is carried out according to different sub-samples--based on foreign-ownership and technology intensity of the industry. FDI and R&D are found to be complements when sample is divided on the bases of equity ownership. FDI inflow induces foreign-owned firms in high tech industries and firms in minority ownership to invest in R&D.

Suggested Citation

  • Sasidharan, Subash & Kathuria, Vinish, 2011. "Foreign Direct Investment and R&D: Substitutes or Complements--A Case of Indian Manufacturing after 1991 Reforms," World Development, Elsevier, vol. 39(7), pages 1226-1239, July.
    • Handle: RePEc:eee:wdevel:v:39:y:2011:i:7:p:1226-1239
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