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Impact of Foreign Direct Investments on Industrial Productivity: A Subnational Study of India

  • Vadlamannati, Krishna Chaitanya
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    The paper uses unique aggregate industry-level dataset at subnational level from India to measure the effects of foreign investments on the productivity of domestic firms. Using pooled regression analysis with fixed effects for the period 2002 – 2005, we find that: (a) foreign investments have significant positive effect on productivity of domestic firms. However, the coefficient values of FDI are smaller, suggesting that the positive effects are marginal. (b) When FDI inflows are controlled for in the cross-section productivity regression, the relationship between the share of foreign technical collaborations and productivity of domestic firms increases significantly. This supports the argument that foreign technical collaborations increase productivity in part through its effect on the FDI inflows. (c) Another interesting finding is that there is no strong evidence to show that this positive effect is state-heterogeneous. In turn, we find partial effects of FDI are marginally higher in non-industrial states. Thus, we suggest that domestic firms can reap rich dividends if the FDI inflows are evenly distributed across the regions, particularly concentrating the efforts on attracting FDI into non-industrial states.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13851.

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    Date of creation: 03 Mar 2009
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    Handle: RePEc:pra:mprapa:13851
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    1. Philippe Aghion & Peter Howitt, 1990. "A Model of Growth Through Creative Destruction," NBER Working Papers 3223, National Bureau of Economic Research, Inc.
    2. Luiz de Mello, 1997. "Foreign direct investment in developing countries and growth: A selective survey," Journal of Development Studies, Taylor & Francis Journals, vol. 34(1), pages 1-34.
    3. Giovanni Peri, 2004. "Catching-Up to Foreign Technology? Evidence on the "Veblen-Gerschenkron" Effect of Foreign Investments," NBER Working Papers 10893, National Bureau of Economic Research, Inc.
    4. Paul M Romer, 1999. "Endogenous Technological Change," Levine's Working Paper Archive 2135, David K. Levine.
    5. Rick L. Williams, 2000. "A Note on Robust Variance Estimation for Cluster-Correlated Data," Biometrics, The International Biometric Society, vol. 56(2), pages 645-646, 06.
    6. Markusen, James R. & Venables, Anthony J., 1999. "Foreign direct investment as a catalyst for industrial development," European Economic Review, Elsevier, vol. 43(2), pages 335-356, February.
    7. David A. Aschauer, 1989. "Public investment and productivity growth in the Group of Seven," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 17-25.
    8. Glass, Amy Jocelyn & Saggi, Kamal, 1999. "Multinational firms and technology transfer," Policy Research Working Paper Series 2067, The World Bank.
    9. M. Ramirez, 2000. "Foreign Direct Investment in Mexico: A Cointegration Analysis," Journal of Development Studies, Taylor & Francis Journals, vol. 37(1), pages 138-162.
    10. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
    11. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
    12. Bulent Unel, 2003. "Productivity Trends in India's Manufacturing Sectors in the Last Two Decades," IMF Working Papers 03/22, International Monetary Fund.
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