Foreign direct investment, prices and efficiency: Evidence from India

Abstract

This paper uses a rich panel dataset of Indian manufacturers to analyze the effects of foreign direct investment (FDI) on domestic firms. Detailed product-level information on prices and quantities allows us to estimate physical productivity and marginal costs. In line with the previous literature, we find little evidence of horizontal spillovers based on commonly used measures of revenue productivity. In contrast, we measure sizable efficiency gains using measures that are not affected by pricing heterogeneity. Our results indicate that domestic firms do benefit from the ability of multinational subsidiaries to produce high-quality products at relatively low cost.