Relationship Between FDI and Exports in the Indian Food and Beverage Sector : An Empirical Study

Abstract

Purpose : The current study focused on analyzing the effect of foreign direct investment (FDI) on export performance and identifying the factors responsible for the diverse export performance of the food and beverage sector of the Indian economy. The fundamental incentive for conducting such a study is the growing relevance of exports and FDI in the internationalization process as well as their role in corporate efficacy. Methodology : Besides FDI being the central variable, certain firm-level variables, namely capital intensity, debt-to-equity ratio, in-house R&D expenditure, embodied technology, disembodied technology, labor productivity, marketing costs, size, and age, were introduced as control variables. The Heckman and Tobit regression approaches were two-panel data techniques used to analyzed and compare the results. Furthermore, the results were computed and analyzed separately for the food, beverage, and manufacturing sectors (comprising the food and beverage sectors taken together). Findings : The findings revealed that regarding the variable FDI, the results were significantly negative, connoting that the nature of FDI is market-seeking intended to capture a more significant share of the domestic market without a subsequent increase in exports. FDI and exports were, hence, substitutes. In-house research and development and disembodied technology have an insignificant impact on export intensity. Capital intensity, debt-to-equity ratio, and embodied technology were significant variables and gave the same results across the methodologies used for the analysis. The results were different across the methods for labor productivity, marketing costs, size, size square, age, and age square. Practical Implications : From the point of view of policymakers, there was no increase in exports as FDI was market-seeking. The Government should formulate policies appropriately to draw in additional FDI that seeks efficiency. Additionally, while capital intensity and debt-to-equity ratios were highly detrimental, exports could be increased in India through labor-intensive technology and better financial conditions. Furthermore, importing raw materials and capital goods should be eased as this improves the quality of products produced for exports. Originality : To the best of our knowledge, this study is the first attempt to investigate the relationship between FDI and exports in the Indian economy’s food and beverage industry in the presence of heterogeneous firm-related characteristics. Understanding this link could help uncover the variables other than FDI that are responsible for varied export performance.