FDI and Export Spillovers: A Case Study of India

Abstract

Using a panel dataset on Indian manufacturing firms from 1994 to 2010, the present study examines the export spillover effects from FDI on Indian manufacturing firms. FDI and its impact on Indian firms have drawn considerable attention during last two decades due to the surge of FDI in India since 2000s. Previous studies have shown that India did not seem to draw any positive benefit from FDI in terms of productivity. However, the impact of FDI spillovers on export performance is relatively less explored. Theory says that export performance of firms is highly influenced by the diffusion of information, knowledge and technology brought by the foreign firms. These above-mentioned channels are referred as information spillovers, competition spillovers, imitation spillovers and skill spillovers which are various channels of horizontal spillovers that influence export performance. Competition, imitation and skill spillovers are called induced export spillover effects as they promote export performance of the domestic firms by improving productivity. A study by Antras and Helpman (2004) argues that the highest productive firms are firms which serve the international market, while the lowest productive firms stay in the domestic market. On the other hand, information spillover induces export performance by reducing the sunk cost associated export activities keeping productivity intact. In this paper, we specifically focus on the horizontal export spillover channels. A very early study by Kumar and Siddharthan (1994) did not find any significant difference in export activities of domestic and foreign firms during the restrictive policy regime. However, recent studies, for example, Joseph and Reddy (2009), Franco and Sasidharan (2010) have shown a significant positive impact of FDI on export performance of the Indian firms. While Joseph and Reddy (2009) took into account both horizontal and vertical export spillover channels, Franco and Sasidharan (2010) is a detailed study of horizontal export spillover channels and their impact on export performance of Indian manufacturing firms. The study showed that the firms with higher R&D capability are in general more benefitted from FDI spillovers as compared to non-R&D firms. The present study is divided into two parts: in the first part, we focus on the FDI spillover effects on the export performance of the domestic firms. While we mention “export performance” of the firms, we refer to two activities: first, whether the decision of the non-exporter firms change and second, how export propensity of the self-selected exporting firms gets influenced by foreign activities. Thus, for the econometric analysis, we use Heckman selection (2 Step) method where the firms self-select themselves as exporters. Our study brings out interesting results. The study does not find any significant positive impact from foreign firms’ domestic activities or export activities unlike previous studies (Franco and Sasidharan 2010). The “export-platform” theory mentioned in Ruane and Sutherland (2005) seems to be prevalent in the case of Indian manufacturing sector. Export activity of the foreign firms not only reduces the export propensity of the domestic firms, it also hinders the decision of the non-export domestic firms to become exporters. Competition spillovers from foreign firms, measured in terms of their domestic sales, show a significant negative impact on the export propensity of the domestic firms. In fact, we find negative impact of skill spillovers on the domestic export activities. Domestic R&D activities by foreign firms remain insignificant throughout. With these results one question followed, is this outcome mainly driven by the initial periods of liberalisation? As spillover theory says, domestic firms take few years to adjust to the new environment and during that period, domestic firms evolve themselves to take advantages from foreign activities. Therefore, the study looked into FDI spillover effects during these sub-periods. Thus, in the second part of the study, we separate the period into two sub-periods: 1994–2001 and 2002–2010 since, in the second period, the Indian manufacturing sector showed huge FDI inflows. We find that export performances of the domestic firms are significantly hurt by the foreign activities during 2002–2010. The FDI spillover results in the first half of the study period mostly remain insignificant due to low foreign presence. Except R&D spillovers, all other spillover variables show significant negative effect on export propensity of the domestic firms during 2002–2010. It seems that exporting foreign firms were reluctant to share their knowledge about international markets with their domestic competitors. Along with the spillover variables, we have taken into consideration various firm-specific characteristics, for example, capital–labour ratio, R&D activity, import of technology, import of raw material and size of the firms as major indicators which influence export performance of the domestic firms. Among the firm variables, import of raw materials and internal R&D activities showed a significant influence on domestic export performance. It is interesting to mention that internal R&D activities influence export decisions of the domestic firms but not their export propensity. Export performance of the Indian manufacturing firms is significantly hindered by use of imported technology or higher capital–labour ratio. It can be argued that domestic export basket is dominated by the low-technology-intensive products, and therefore use of technology does not help these firms.

Appendix

Table 5 FDI and export spillovers on domestic firms in aggregate manufacturing sector (1994–2001 and 2002–2010): Results from Heckman selection model (MLE)