Foreign direct investment and horizontal spillover effects in the Indian pharmaceutical industry

Abstract

The study empirically examines firstly, the horizontal spillover effects of foreign direct investment (FDI) on the productivity of Indian pharmaceutical firms. Generalized Method of Moments estimators are applied for the firm-level panel data of Indian pharmaceutical companies whose shares were traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The information was collected from the Centre for Monitoring Indian Economy (CMIE) Prowess database from 2015 to 2019. Based on the regularity in data availability, the sample firms are limited to 112 companies, 100 of which are domestic firms and 12 international firms. Firms with more than 10 percent foreign equity are classified as FDI firms, while those with less than that are classified as domestic firms. Estimation results show that foreign ownership significantly contributes to the productivity of domestic firms. Due to increased competition, the Indian pharmaceutical companies with foreign equity participation are more productive than local ones. Moreover, the findings reveal a positive and significant horizontal spillover effect from FDI on the productivity of domestic enterprises. Secondly, the study investigates the horizontal spillovers of Foreign Direct Investments on export performance of domestic company in pharmaceutical industry. The empirical results show that there is positive influence of Foreign affiliates on indigenous firms in the sector. Finally, the study investigated the causal association among FDI inflows in pharmaceutical industry, economic growth and Exports. By employing Autoregressive Distributed lag model the study establishes the long-run as well as short-run associations among the variables.