Abstract
Using a panel dataset on Indian manufacturing firms from 1994 to 2010, the present paper examines the productivity spillovers from the foreign direct investment (FDI) through various channels of horizontal and vertical linkages. In addition, the study also focuses on the influence of domestic firms’ initial capabilities in absorbing FDI-induced technological benefits. Firm productivity has been measured by using the semi-parametric Levinsohn–Petrin methodology. Using the fixed-effect panel model to estimate spillover models, the initial results show that the productivity growth of Indian firms is adversely affected by various horizontal spillover channels, while the vertical linkages are found insignificant. Interestingly, the second part of the study reveals that only the domestic firms with some initial technological capabilities (proxied by initial three years’ R&D activities), low technology gap with the foreign firms in the initial periods and high complementary capabilities (proxied by initial three years’ average firm size) gain productivity benefits from FDI spillover channels as compared to other firms within the industry. Essentially, the study brings out the importance of domestic firms’ need to encourage internal R&D activities in absorbing technological benefits from foreign presence and their economic activities in the domestic market.
The earlier version of the paper was presented in the XI Annual Conference of the Forum for Global Knowledge Sharing (FGKS) held in IIT, Madras. I am grateful to Prof. N.S. Siddharthan, Prof. K.L. Krishna, Prof. K. Narayanan and Dr. Subash Sasidharan for their valuable comments which have helped a lot to improve the paper and give it the present shape.
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Notes
- 1.
In this study, the productivity spillover and technology spillover terms have been used interchangeably. In this context, it is necessary to distinguish between technology or productivity spillovers from technology transfer from foreign to domestic firms. In the case of technology spillover, domestic firms acquire foreign technology without fully compensating the foreign firms or not through the market transactions. When the technology flows from foreign to domestic firms through proper market transactions, we can call it technology transfer.
- 2.
- 3.
X-inefficiency is the difference between the potential and observed behaviour of the firm. It occurs when potential productive efficiency is not reached due to lack of competitive pressure within the industry.
- 4.
- 5.
Most of the studies have considered the current R&D activity as the firm capability which helps in exploiting spillover effects from FDI. Among other factors, competitive environment of the industry or openness of the industry is considered as other factors which might help in gaining spillover benefits from foreign investments. In the present study, we have not discussed those factors in detail as we mainly focus on the initial-level capabilities of the domestic firms.
- 6.
We have to note that it was during this period the global economy went into recession. Therefore, we cannot fully attribute the lack of investment inflows to the domestic economic inadequacies.
- 7.
Following the definition of IMF, we define the foreign firms as the firm with more than or equal to 10% of foreign promoters’ share holding.
- 8.
Electrical, Chemical, manufacturer of transport equipments, Machinery industries, etc., belong to the MLT and MHT sectors. These industries are considered to be the strong industries in India as they use semi-skilled workers and undertake moderate R&D activities.
- 9.
A few indicators are provided in the Appendix Table 5.6.
- 10.
State variables are fixed factors which are affected by the distribution of ω it , conditional on the information set available at (t−1) period and past values of ω it . In the case of free variables, the input choices by the firms depend upon the current values of ω it (Ollay and Pakes 1996).
- 11.
Detailed estimation process is given in Levinsohn and Petrin (2003).
- 12.
- 13.
To measure vertical spillover variables, the FDI variable or the foreign presence within industry is measured by the foreign output share in total industry output (not domestic sales as discussed before). Output considers total domestic sales and export of the firms.
- 14.
There is high correlation among the spillover variables. Therefore, we use separate models representing the firm capabilities and their interactions with spillover variables.
- 15.
For the analysis, we drop first three years for each firm as this is considered as the production capability of the firms in the pre-sample period. Due to the endogeneity of the production capability measure, the whole sample years were divided into pre-sample period and current period. The endogeneity problem arises because the production capability and the current productivity are jointly determined (Blalock and Simon 2009). As was argued by Blalock and Simon (2009), to avoid the prior production capabilities acquired from FDI. It is possible that low-productive firms gain immediately and heavily at the initial period of foreign entrance. High productivity of the later years would outweigh the initial low productivity and laggard firms would emerge as highly productive firms which are not true. Therefore, the measurement of the production capability does not consider the entire period. By separating the panel, prior technology competency of pre-sample period is calculated.
- 16.
Average R&D intensity is measured as the ratio of average R&D expenditure of the domestic firms in the initial three years to average sales of the domestic firm.
- 17.
As median productivity of the foreign firms is considered as the “frontier” benchmark for the measurement of technology gap, the gap for foreign firms does not make any sense and thus we did not report it in the table.
- 18.
However, our finding contradicts the study by Lall (1978) which found significant positive impact of FDI backward linkage on the productivity of the Truck industry in India.
- 19.
For the convenience, we have reported only the spillover variables and the interaction terms in the text.
- 20.
The coefficient of the IMITATION variable in Model 5 is insignificant although carries a negative sign. The estimates of Model 2 showed that without the interaction terms, Comp, IMITATION and SKILL variables had significant negative impact on the productivity growth of the domestic firms. Due to the inclusion of the interaction terms in the models, these variables become insignificant. This reflects that the negative impacts of the foreign activities within sector would reduce if the domestic firms possess particular firm specific capabilities. Or, in other words, firms with higher R&D activity, low technology gap and larger size are capable of extracting benefits from intra-industry foreign activities.
- 21.
Comparing the coefficients of the interaction terms between horizontal and vertical spillover channels with initial absorptive capacity and technology gap variables, we can say that firms with initial absorptive capacity and technological capabilities gain higher productivity from vertical spillover channels as compared to the intra-industry spillover channels. Upstream and downstream domestic firms obtain advanced technology, financial support, labour training, etc., directly from the foreign firms related through the vertical linkages. R&D activity, larger size and low technology gap of the domestic firms are added advantages for the domestic firms in upstream and downstream sectors for gaining more productivity compared to other firms. On the other hand, industries where foreign and domestic firms act as competitors, foreign firms attempt to reduce the leakage of knowledge to the domestic firms in different ways. Thus, to gain benefits from foreign activities within industry, domestic firms need to be highly technologically proficient. Moreover, the cost of learning is also high in the case of horizontal spillovers. Therefore, it is apparent that any firm capability would be highly beneficial for the firms in upstream and downstream sectors compared to competing sector.
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Mondal, S., Pant, M. (2018). Firm Capabilities and Productivity Spillovers from FDI: Evidence from Indian Manufacturing Firms. In: Siddharthan, N., Narayanan, K. (eds) Globalisation of Technology. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-5424-2_5
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