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Knowledge Spillovers and Productivity Growth: Role of Absorptive Capacity in the Indian Manufacturing Sector

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Abstract

The paper explores the role of absorptive capacity in understanding the association between international knowledge spillovers and total factor productivity (TFP) growth in Indian manufacturing. Imports and FDI provide two major channels of knowledge spillovers while private research and development (R&D) and education-weighted human capital are used as proxies for domestic absorptive capacity. Applying pooled linear regression on 2-digit manufacturing sectors based on NIC 2008 (ISIC Rev. 4) for 2000–2016 in India, positive spillover effects of FDI and imports on TFP growth are confirmed. However, when looking at moderation effects, absorptive capacity is found to moderate the relationship between knowledge spillovers and domestic productivity negatively. When the manufacturing sectors are sub-grouped based on their technological intensities, interesting differences emerge. For the low-tech and medium–low-tech sectors, spillovers from FDI negatively affect TFP. In contrast, in the high-tech and medium–high-tech sectors, spillovers from imports as well as FDI have a dampening effect on productivity. With respect to interaction effects, absorptive capacity negatively moderates the relationship between FDI spillovers and TFP growth in the low-tech sectors. In the high-tech sectors, interestingly, human capital positively moderates import spillovers for productivity growth while no such moderation effect is found for R&D. Overall, results indicate that industries witnessing considerable FDI inflows and imports in recent years have not experienced direct productivity gains in the same proportion. This highlights the importance of absorptive capacity for productivity growth and the need for policy intervention at disaggregated sectoral level in India.

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Notes

  1. Manufacturing in India: Creating a Smarter Future (2017).

  2. Our definition of knowledge spillovers includes both voluntary knowledge transfers and unintended knowledge spillovers.

  3. The India KLEMS database is part of an ongoing research project supported by the Reserve Bank of India (RBI) that provides data for analysing productivity of the Indian economy at disaggregate industry level. It covers 27 industries based on the NIC classification and provides measures of economic growth, capital formation, and productivity from 1980 to 1981 onwards. The input measures incorporate various categories of capital (K), labour (L), energy (E), material (M), and services (S) inputs, while the output measures provide information on total factor productivity (TFP), value added, and labour and capital estimates at the disaggregated level. The database is constructed using data compiled from the Central Statistical Office (CSO), NSSO, ASI, and Input–Output tables and harmonized for uniformity across industrial classification and aggregation levels.

  4. Stata do-files for matching of six-digit HS 1996, HS 2002, and HS 2007 codes to two-digit NIC 2008 manufacturing categories are available from the author upon request.

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Acknowledgements

The authors acknowledge the suggestions received at various conferences and workshops both nationally and internationally (DST-CPR Review Meetings 2018, 2019, 2020, IISES Croatia 2019, ICPPM India 2019, AAAS United States of America 2018). We thank anonymous referees for their careful reading and comments. We extend our gratitude to Prof. Ambuj Sagar, Prof. S. Natesh, and other colleagues at the DST-CPR for valuable feedback on the practical implications of the research project.

Funding

This research would not have been possible without the outstanding support of Department of Science and Technology, Government of India who has generously provided financial assistance as well as capacity-building activities in policy-making.

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Correspondence to Ipsita Roy.

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Appendix

Appendix

Table 3 Matching of NIC 1998, NIC 2004, and NIC 2008 codes
Table 4 HS 2007 product composition of manufacturing of chemicals acc. to NIC 2008

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Roy, I., Paul, S.B. Knowledge Spillovers and Productivity Growth: Role of Absorptive Capacity in the Indian Manufacturing Sector. J Ind Compet Trade 22, 233–257 (2022). https://doi.org/10.1007/s10842-022-00382-y

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