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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

  • Adamos Adamou

    (MSE)

  • Subash S

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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File URL: http://www.eaber.org/node/22492
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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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  1. Robert Becker & Edwin Burmeister (ed.), 1990. "Growth Theory," Books, Edward Elgar Publishing, volume 0, number 534, 8.
  2. Ann E. Harrison & Brian J. Aitken, 1999. "Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela," American Economic Review, American Economic Association, vol. 89(3), pages 605-618, June.
  3. Ariel Pakes & Richard Ericson, 1989. "Empirical Implications of Alternative Models of Firm Dynamics," NBER Working Papers 2893, National Bureau of Economic Research, Inc.
  4. Hall, Bronwyn H, 1987. "The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 583-606, June.
  5. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  6. Tor Jakob Klette & Zvi Griliches, 1997. "Empirical Patterns of Firm Growth and R&D Investment: A Quality Ladder Model Interpretation," Discussion Papers 188, Statistics Norway, Research Department.
  7. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
  8. Roger Smeets, 2008. "Collecting the Pieces of the FDI Knowledge Spillovers Puzzle," World Bank Research Observer, World Bank Group, vol. 23(2), pages 107-138, March.
  9. Timothy Dunne & Mark J. Roberts & Larry Samuelson, 1989. "The Growth and Failure of U. S. Manufacturing Plants," The Quarterly Journal of Economics, Oxford University Press, vol. 104(4), pages 671-698.
  10. Bajari, Patrick & Benkard, C. Lanier & Levin, Jonathan, 2007. "Estimating Dynamic Models of Imperfect Competition," Research Papers 1852r1, Stanford University, Graduate School of Business.
  11. 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.
  12. Georgios Fotopoulos & Helen Louri, 2004. "Firm Growth and FDI: Are Multinationals Stimulating Local Industrial Development?," Journal of Industry, Competition and Trade, Springer, vol. 4(3), pages 163-189, 09.
  13. Francesca Lotti & Enrico Santarelli & Marco Vivarelli, 2003. "Does Gibrat's Law hold among young, small firms?," Journal of Evolutionary Economics, Springer, vol. 13(3), pages 213-235, August.
  14. K. R. Shanmugam & Saumitra Bhaduri, 2002. "Size, age and firm growth in the Indian manufacturing sector," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 607-613.
  15. Kumar, Nagesh, 2001. "Determinants of location of overseas R&D activity of multinational enterprises: the case of US and Japanese corporations1," Research Policy, Elsevier, vol. 30(1), pages 159-174, January.
  16. Fotopoulos, Georgios & Louri-Dendrinou, Eleni, 2002. "Corporate Growth and FDI: Are Multinationals Stimulating Local Industrial Development?," CEPR Discussion Papers 3128, C.E.P.R. Discussion Papers.
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