Skip to main content

Advertisement

SpringerLink
Log in

Foreign Direct Investment and Employment in Indian Manufacturing Industries

  • Article
  • Published:
The Indian Journal of Labour Economics Aims and scope Submit manuscript

Abstract

This paper examines the employment effect of foreign direct investment (FDI) in India’s manufacturing industries. It also examines whether the nature of employees mediates the employment effect of FDI in the manufacturing industry. The paper employs a balanced panel data of 54 three-digit industries from the Annual Survey of Industries for the period 2008–2009 to 2015–2016. Estimating a dynamic labour demand model through the system generalised method of moments estimator, it does not find any considerable effect of FDI on employment in India’s manufacturing industries. Even after controlling for the kind of employees, FDI has not been found to have any significant impact on domestic demand for labour in Indian manufacturing industries. This study thus does not consider FDI as an important channel for employment generation in the manufacturing industry in India.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. FDI, foreign firms, and foreign affiliates are used interchangeably.

  2. FDI inflow is calculated as net of repatriation/disinvestment.

  3. See Nickell (1986), Hamermesh (1993), and Bresson et al. (1996), for dynamic labour demand functions.

  4. This lagged structure in the labour demand function is justified because there are different adjustment costs when employing aggregated measures of employment across different skill categories (Nickell 1986). And it is necessary if serially correlated technological shocks are present (Greenaway et al. 1999).

  5. The Sargan test has null hypothesis—the instruments as a group are exogenous. Thus, the higher p value of Sargan statistic is generally preferred, because it fails to reject the null hypothesis and ensures the validity of the system-GMM estimator. However, in robust estimation, we generally report Hansen J statistic instead of Sargan; both Sargan and Hansen J statistic have the same null hypothesis.

  6. The AR test has a null hypothesis of “no auto-correlation”, and it is applied to the difference residuals. The test for the AR (1) process in first differences usually rejects the null hypothesis, but this is expected since \(\Delta e_{i,t} = e_{i,t} - e_{i,t - 1}\) and \(\Delta e_{i,t - 1} = e_{i,t - 1} - e_{i,t - 2}\) both have \(e_{i,t - 1}\). The test for AR (2) in first differences is more important because it will detect auto-correlation in levels. If we fail to reject the null it gives support to the model and ensures the validity of the system-GMM estimator.

  7. These three-digit industries belong to the 18 two-digit industries, viz. food products (10), textiles (13), leather and leather-related products (15), wood and wood products (16), paper and paper products (17), printing (18), coke and petroleum products (19), chemicals (20), pharmaceuticals (21), rubber products (22), other non-metallic mineral products (23), basic metals (24), computer and electronics (26), electrical equipments (27), machinery and equipments (28), motor vehicles, trailer and semi-trailers (29), other transport equipments (30), and other manufacturing (32).

  8. Workers, the blue-collar workers, include all persons employed directly or indirectly in any manufacturing process or in cleaning any part of machinery or premises used for the manufacturing process or in any kind of work connected with the manufacturing process or the subject of the manufacturing process. And, the persons engaged in repair and maintenance of production of the fixed asset for factory’s own use or persons employed for generation of electricity, etc., are also blue-collar workers.

  9. A simple labour demand model is \(\ln N_{i,t} = \theta + \emptyset_{1} \ln Y_{i,t} + \emptyset_{2} \ln w_{i,t} + \emptyset_{3} \ln {\text{FDI}}_{i,t} + \lambda_{t} + v_{i} + e_{i,t}\).

  10. See Table 6 in “Appendix”.

References

  • Almeida, R. 2007. The labour market effects of foreign owned firms. Journal of International Economics 72(1): 75–96.

    Article  Google Scholar 

  • Arellano, M., and S. Bond. 1991. Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. The Review of Econometric Studies 58(2): 277–297.

    Article  Google Scholar 

  • Arellano, M., and O. Bover. 1995. Another look at the instrumental variable estimation of error-component models. Journal of Econometrics 68(1): 29–51.

    Article  Google Scholar 

  • Bagchi-Sen, S. 1991. Employment in foreign-owned manufacturing firms in The United States—the impact of modes of entry. Tijdschrift voor economische en sociale geografie 82(4): 282–294.

    Article  Google Scholar 

  • Bandick, R., and P. Karpaty. 2011. Employment effects of foreign acquisition. International Review of Economics & Finance 20(2): 211–224.

    Article  Google Scholar 

  • Blomstrom, M., and A. Kokko. 2003. The economics of foreign direct investment incentives, NBER Working Paper 9489. https://www.nber.org/papers/w9489.pdf. Accessed on April 2010.

  • Blundell, R., and S. Bond. 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87(1): 115–143.

    Article  Google Scholar 

  • Borensztein, E., J. De Gregorio, and J.W. Lee. 1998. How does foreign direct investment affect economic growth? Journal of International Economics 45(1): 115–135.

    Article  Google Scholar 

  • Bresson, G., F. Kramarz, and P. Sevestre. 1996. Dynamic labour demand models. In The econometrics of panel data: Advanced studies in theoretical and applied econometrics, ed. L. Mátyás and P. Sevestre, 660–684. Dordrecht: Springer.

    Chapter  Google Scholar 

  • Coniglio, N.D., F. Prota, and A. Seric. 2015. Foreign direct investment, employment and wages in Sub-Saharan Africa. Journal of International Development 27(7): 1243–1266.

    Article  Google Scholar 

  • Dinga, M., and D. Münich. 2010. The impact of territorially concentrated FDI on local labour markets: Evidence from the Czech Republic. Labour Economics 17(2): 354–367.

    Article  Google Scholar 

  • Girma, S. 2005. Safeguarding jobs? Acquisition FDI and employment dynamics in U.K. manufacturing. Review of World Economics 141(1): 165–178

    Article  Google Scholar 

  • Greenaway, D., R.C. Hine, and P. Wright. 1999. An empirical assessment of the impact of trade on employment in the United Kingdom. European Journal of Political Economy 15(3): 485–500.

    Article  Google Scholar 

  • Hamermesh, D. S. 1993. Labor demand and the source of adjustment costs, working paper (No. w4394), National Bureau of Economic Research.

  • Hijzen, A., P. S. Martins, T. Schank, and R. Upward. 2013. Foreign-owned firms around the world: A comparative analysis of wages and employment at the micro-level. European Economic Review, 60: 170–188.

    Article  Google Scholar 

  • Jude, C., and M.I.P. Silaghi. 2016. Employment effects of foreign direct investment: New evidence from Central and Eastern European countries. International Economics 145: 32–49.

    Article  Google Scholar 

  • Karlsson, S., N. Lundin, F. Sjöholm, and P. He. 2009. Foreign firms and Chinese employment. The World Economy 32(1): 178–201.

    Article  Google Scholar 

  • Lipsey, R. E., Sjöholm, F., and Sun, J. 2010. Foreign ownership and employment growth in Indonesian manufacturing, working paper (No. w15936), National Bureau of Economic Research.

  • Malik, S.K. 2015. Conditional technology spillovers from foreign direct investment: Evidence from Indian manufacturing industries. Journal of Productivity Analysis 43(2): 183–198.

    Article  Google Scholar 

  • Milner, C., and P. Wright. 1998. Modelling labour market adjustment to trade liberalisation in an industrialising economy. The Economic Journal 108(447): 509–528.

    Article  Google Scholar 

  • National Industrial Classification. 2008. National Industrial Classification (All Economic Activities) 2008. Central Statistical Organisation, Ministry of Statistics and Programme Implementation, Government of India, New Delhi, India.

  • Nickell, S.J. 1986. Dynamic models of labour demand. In Handbook of labor economics, ed. O.C. Ashenfelter and R. Layard, 473–522. New York: North Holland.

    Chapter  Google Scholar 

  • Onaran, O. 2008. Jobless growth in the central and east European countries: A country-specific panel data analysis of the manufacturing industry. Eastern European Economics 46(4): 90–115.

    Article  Google Scholar 

  • Peluffo, A. 2015. Foreign direct investment, productivity, demand for skilled labour and wage inequality: An analysis of Uruguay. The World Economy 38(6): 962–983.

    Article  Google Scholar 

  • Petreski, M. 2009. Analysis of exchange-rate regime effect on growth: Theoretical channels and empirical evidence with panel data, Economics Discussion Papers (No 2009-49), Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-49. Accessed on 10 April 2017.

  • Reserve Bank of India. 2018. Database on Indian economy. Reserve Bank of India.

  • Saraswathy, B. 2015. Production efficiency of firms with mergers and acquisitions in India (No. 299). Working paper 299, Indian Council for Research on International Economic Relations, New Delhi. http://icrier.org/pdf/Working_Paper_299.pdf. Accessed on 15 April 2018.

  • UNCTAD. 2005. World Investment Report 2005. United Nations Conference on Trade and Development, United Nations, New York and Geneva.

  • Waldkirch, A., P. Nunnenkamp, and J.E. Alatorre Bremont. 2009. Employment effects of FDI in Mexico’s non-maquiladora manufacturing. The Journal of Development Studies 45(7): 1165–1183.

    Article  Google Scholar 

Download references

Acknowledgements

The earlier version of this paper was presented at 14th Annual Conference on Economic Growth and Development, held at Indian Statistical Institute, Delhi, during 19–21 December 2018. It was also presented at Institute for Studies in Industrial Development (ISID), New Delhi, on 27 February 2019. The author is thankful to Yashobanta Parida for his suggestions on the earlier version of this paper. All errors that remain are solely mine.

Author information

Authors and Affiliations

  1. Institute for Studies in Industrial Development (ISID), 4, Institutional Area, Phase II, Vasant Kunj, New Delhi, 110 070, India

    Sanjaya Kumar Malik

Authors
  1. Sanjaya Kumar Malik
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sanjaya Kumar Malik.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 6, 7, 8, and 9.

Table 6 Net cross-border M&As sales by India.
Full size table
Table 7 Estimation of simple labour demand in the manufacturing industry; dependent variable: total employment and time period: 2008–2009 to 2015–2016
Full size table
Table 8 Estimation of simple labour demand in the manufacturing industry; dependent variable: white-collar employment and time period: 2008–2009 to 2015–2016
Full size table
Table 9 Estimation of simple labour demand in the manufacturing industry; dependent variable: blue-collar employment and time period: 2008–2009 to 2015–2016
Full size table

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Malik, S.K. Foreign Direct Investment and Employment in Indian Manufacturing Industries. Ind. J. Labour Econ. 62, 621–637 (2019). https://doi.org/10.1007/s41027-019-00193-6

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s41027-019-00193-6

Keywords

Search

Navigation