Effect of Foreign Firms and Their Linkages on Domestic Firms in the Indian Manufacturing Industry: Evidence from 1989-2004

Abstract

Foreign Direct Investment (FDI) has been an area that has invoked interest both among researchers and policy makers. FDI is one of those areas, which has benefits both for the host country and the home country. Multinational corporations or foreign firms are supposed to have frontier technology, hence when they enter a market they are expected to have spillover effects on local firms. Most of the studies in India till now have focused on intra-industry spillovers and have found evidence for intra-industry spillovers in the Indian industry. The present study focus is on inter-industry spillovers (for e.g. auto components to assemblers) as literature expects inter-industry spillover to be unambiguously present than intra-industry spillovers and also as there are very few studies in this area. This paper establishes that there exist spillover effects on domestic firms due to horizontal, backward and forward Linkages with foreign firms in the Indian manufacturing industry that affect domestic firms productivity. An interesting result of this chapter is that inter-industry spillovers are found to be negative for few industries.