ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Does FDI Contribute to Growth?

Evidence from the Capital Goods Sector in India

This paper investigates if foreign direct investment contributes to the growth of industry by examining the spillover gains in the capital goods sector. It compares the performance of foreign and domestic firms in the sector between 1994-95 and 2009-10 by using the asset turnover ratio (ATO) and the return on capital employed (ROCE). The results indicate that except during the high growth period 2004-08, there is no significant difference between the ATOs of domestic and foreign firms and the ROCE of foreign firms is significantly higher than that of domestic firms. However, during this high growth period, the ATO of domestic firms is significantly higher than that of foreign firms and ROCE of foreign and domestic firms are same. Thus, the spillover effects are very slow to be realised and higher benefits from FDI have accrued to foreign firms. We do not find support for FDI as one of the key drivers for industrial growth in capital goods sector as claimed by the industry captains.

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