Foreign direct investment and technology spillover: an analysis within or between select industries of Indian manufacturing sector

Abstract

The study attempts to explore the different aspects of the technology spillover effect of foreign direct investment (FDI) across Indian manufacturing Industries. Initially, the study attempts to examine the role and presence of FDI and its horizontal technological spillovers effect on domestic firm s labor productivity across sixteen organized Indian manufacturing industries. Foreign presence by way of FDI reflects the horizontal spillover across manufacturing industries in India. To measure the FDI and its horizontal technology spillover effect, sixteen manufacturing industries have been selected, out of which twelve are broad 2-digit level and four allied industries which are part of chemicals, transportation, electronics, and rubber and plastic products. The study has undertaken an industry-level analysis of sixteen manufacturing industries out of which 2148 firms are considered as domestic firms and 231 firms are considered as foreign firms, so that the total firms in these sixteen selected industries are 2379. Data has been collected from the various sources for example: the principal source is CMIE based Prowess data set, while other data sources are the Annual Survey of Industries (ASI), National Accounts of Statistics (NAS), RBI Bulletin, and Handbook of Statistics on Indian Economy, etc. The analysis gives a long-run relationship of labor productivity with respect to the set of explanatory variables, which further leads to technology spillovers across Indian manufacturing industries. To estimate the long-run relationship the study has employed the methodology of Pedroni panel cointegration, group fully modified OLS (GFMOLS), fully modified OLS (FMOLS), and dynamic OLS (DOLS) techniques. By employing Pedroni (2000, 2004) cointegration tests, we find a significant long-run relationship between labor productivity in large size domestic firms and its determinants in the empirical model.