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

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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.

FDI and Firm Competitiveness

As developing countries are increasingly opening up their economies to foreign direct investment, one of the principal objectives has been to enhance competitiveness of domestic firms using their network, technology and organisational skill. This study on India shows that competitiveness is more likely to be achieved with the presence of foreign firms rather than by simple purchase of foreign technology. Absorptive capacity of firms and institutional factors (namely, competition in the industry) induce competitiveness among firms. It is seen that both the degree of competition and the absorptive capacity of firms have strong effects on indirect benefits from FDI in enhancing competitiveness
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