Productivity spillovers from technology transfer to Indian manufacturing firms

The present paper employs techniques from stochastic production frontier and panel data literature to test a spillover hypothesis for large sized firms that ‘presence of foreign‐owned firms and foreign technical capital stock in a sector leads to reduced dispersion in efficiency in the sector and fall is higher for the firms that invest in R&D activities’. Dispersion being a relative concept, it may still fall if both the leading foreign firm and domestic firms show fall in technical efficiency over the period and the fall for the leader is higher and vice versa. Given the focus of the study, where concern is for the learning by the domestic firms, the study tries to get around with the problem partially, by testing the hypothesis for those local firms that have shown productivity improvement over the period. Results suggest that foreign‐owned firms are close to the frontier in 13 of the total 26 sectors studied. Spillovers result for these 13 sectors indicate that there exist negative spillovers from the presence of foreign firms in the sector, but available foreign technical capital stock has a positive impact. Interesting differences emerge when the sample is bifurcated into scientific and non‐scientific subgroups. Results for the scientific subgroup indicate that the indirect gains or spillovers are not automatic consequence of foreign firm's presence, but they depend to a large extent on the efforts of local firms to invest in learning or R&D activities so as to decodify the spilled knowledge. On the other hand, the evidence of spillovers to non‐scientific non‐FDI firms is not very strong. Copyright © 2000 John Wiley & Sons, Ltd.