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The Impact of R&D and Foreign Direct Investment on Firm Growth in Emerging-Developing Countries : Evidence from Indian Manufacturing Industries

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  • Adamos Adamou

    (MSE)

  • Subash S
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    Abstract

    This paper examines the impact of R&D and FDI on firm growth for a panel data of Indian manufacturing firms. We argue that besides age and size, FDI and R&D are essential determinants of firm growth. We use GMM estimation for fixed effects panel data models to control for endogenity of R&D and FDI. We find that an increase in current R&D induces higher growth across all industries; where as the effect of increase in FDI is mixed - higher growth in some industries and lower growth in some others. Furthermore, Gibrats law is not only rejected by our main model but it is also rejected by a unit root test for unbalanced panel datasets. This provides strong evidence in favor of our model. Finally, firm growth is negatively associated with its size and it is convex with respect to its age. The fact that firm growth is not diminishing convex but just convex with respect to age, contradicts the Jovanovics argument that younger firms tend to grow faster than their older counterparts. With respect to firm growth, the absence of learning-effects appears to be the main difference between emerging-developing and developed countries.

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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22492.

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    Date of creation: Jan 2008
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    Handle: RePEc:eab:develo:22492

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    Related research

    Keywords: R&D; foreign direct investment; panel data; firm growth;

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    References

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    1. K. R. Shanmugam & Saumitra Bhaduri, 2002. "Size, age and firm growth in the Indian manufacturing sector," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(9), pages 607-613.
    2. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    3. Kumar, Nagesh, 2001. "Determinants of location of overseas R&D activity of multinational enterprises: the case of US and Japanese corporations1," Research Policy, Elsevier, Elsevier, vol. 30(1), pages 159-174, January.
    4. Patrick Bajari & C. Lanier Benkard & Jonathan Levin, 2004. "Estimating Dynamic Models of Imperfect Competition," NBER Working Papers 10450, National Bureau of Economic Research, Inc.
    5. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2003. "Does Gibrat's Law hold among young, small firms?," Journal of Evolutionary Economics, Springer, Springer, vol. 13(3), pages 213-235, August.
    6. Fotopoulos, Georgios & Louri-Dendrinou, Eleni, 2002. "Corporate Growth and FDI: Are Multinationals Stimulating Local Industrial Development?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3128, C.E.P.R. Discussion Papers.
    7. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, American Economic Association, vol. 89(3), pages 605-618, June.
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