Country Origin of Foreign Direct Investment in Indian Manufacturing and its Impact on Productivity of Domestic Firms

The paper analyzes productivity enhancing effects of foreign direct investment (FDI) among Indian manufacturing firms. The issue particularly examined is, how country of origin of FDI makes a difference to the impact of FDI on firm-level productivity, adding to a growing international literature on this subject. Data on about 7000 manufacturing companies drawn from Prowess covering the period 2000-01 to 2014-15 are used for the analysis. On the basis of data on equity holding pattern, companies with significant FDI (share of foreign promoter(s) in equity being 10% or more), termed as FDI firms as distinct from domestic firms, are identified. To investigate the issue of country of origin of FDI making a difference to the impact of FDI on firm productivity, a distinction is made between FDI from developed countries and that from developing countries, and between FDI from USA/Europe and that from Asian countries. A Cobb-Douglas production (value added) function is estimated from pooled data on manufacturing companies, applying the LevinshonPetrin method, which yields estimates of TFP for each company for each year. In the next step, a comparison of TFP is made between domestic firms and FDI firms by applying regression analysis, with further segregation made according to the country of origin of FDI. A supplementary analysis of the impact of foreign acquisition of domestic firm on their TFP is undertaken with the help of treatment effect assessment methods. An analysis of productivity spillover from FDI firms to domestic firms undertaken with the help of regression analysis, considering both horizontal and vertical spillover effects. A comparative analysis of horizontal and vertical spillover effects by the country of origin of FDI is carried out, making a distinction between FDI from developed and that from developing countries, and also between FDI from USA/Europe and that from Asian countries.