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

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A Stochastic Frontier Approach

FDI Spillovers on Technical Efficiency of Indian Manufacturing Firms

The impact of foreign direct investment on technical efficiency of Indian manufacturing firms during two sub-periods, 1994–2001 and 2002–10, is investigated. Using stochastic frontier analysis, this study shows that domestic firms gain efficiency from foreign skill spillovers and backward linkages with foreign firms in the first sub-period. However, evidence from the second sub-period indicates a significant adverse impact of oreign-owned firms on domestic firms. It may be noted that flows of FDI increased mainly in the 2000s. The study also shows that technology gains occur through internal research and development expenditure, and through purchase of imported raw materials and capital goods rather than through purchase of imported drawings and designs.

This article examines the impact of foreign direct investment (FDI)-induced efficiency spillovers in the Indian organised manufacturing sector. The significance of FDI in economic growth has been well documented in the economic literature. In the standard neo-classical growth theories, FDI is considered as an alternative source of capital accumulation or investment. However, due to diminishing factor returns, these theories predict that in the long run, the impact of FDI can be either limited or transitory (Kinoshita and Campos 2003). In contrast, the endogenous growth theories emphasise the role of technological progress in augmenting economic growth and argue that FDI can have an endogenous effect on output, as it creates increasing returns to capital through positive externalities and spillover effects (De Mello 1997).

In a very early work, Hymer (1976) mentioned that the multinational enterprises (MNEs) exploit the advantages of market imperfection through their command over the assets, which include superior technology and knowledge, distribution networks, product diversification, and credit advantages. Later, Dunning (1977) showed that these intangible assets owned by MNEs not only help them exploit the host country’s market imperfections, maximising their returns, but also affect host country conditions like productivity, efficiency, and wage levels. These early studies have been extended in various ways over the past few decades, by looking into the indirect benefits accrued by local firms from the diffusion of these intangible assets through various “channels,” named after the assets spilled over or the economic activities undertaken by the foreign firms.

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Updated On : 14th Feb, 2020

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