Jaya Prakash Pradhan

The determinants of outward foreign direct investment: a firm-level analysis of Indian manufacturing

This paper analyses the determinants of the overseas direct investment activity of Indian manufacturing enterprises. In general, several firm‐specific characteristics such as age, size, R&D intensity, skill intensity and export orientation are observed to be important explanatory factors in the outward foreign direct investment (O‐FDI) activity of Indian firms. The impact of age and size on O‐FDI has been observed to be non‐linear. The product differentiation activities and the productivity of firms are other useful factors in overseas production expansion in certain industries. The study reveals that the performance of these firm‐specific variables is subject to sectoral dynamics. Internationalization of production activities of Indian firms has been observed to be partly fuelled by policy liberalization during the 1990s.This paper analyses the determinants of the overseas direct investment activity of Indian manufacturing enterprises. In general, several firm-specific characteristics such as age, size, R&D intensity, skill intensity and export orientation are observed to be important explanatory factors in the outward foreign direct investment (O-FDI) activity of Indian firms. The impact of age and size on O-FDI has been observed to be non-linear. The product differentiation activities and the productivity of firms are other useful factors in overseas production expansion in certain industries. The study reveals that the performance of these firm-specific variables is subject to sectoral dynamics. Internationalization of production activities of Indian firms has been observed to be partly fuelled by policy liberalization during the 1990s.

Growth of Indian Multinationals in the World Economy: Implications for Development

The importance of Indian multinationals in the world economy has been growing significantly since 1990s. An increasing number of Indian firms across wide range of sectors are undertaking large overseas projects and their focus is gradually shifting towards developed countries. Until then, OFDI from India was confined to a small number of family-owned firms primarily investing in developing countries through joint-ownership arrangement. These changing natures of Indian OFDI are likely to have a number of implications for the development of both host and home country. This study had explored some of these issues relating to the growth of Indian multinationals.

Quality of Foreign Direct Investment, Knowledge Spillovers and Host Country Productivity: A Framework of Analysis

The existing research on knowledge‐spillovers from foreign direct investment (FDI) has invariably treated all foreign firms as homogeneous and of equal importance for the development of host countries. However, in actual market situations foreign firms are basically non‐homogeneous and of varying qualities as far as the potential for knowledge‐spillover are concerned. Foreign firms differ in terms of export‐orientation, intensity to undertake local R&D activities, vertical integration, generating demands for local raw materials, and entry modes. Non‐inclusion of such quality dimensions of FDI into the spillover analysis is certainly an important limitation of the existing literature. This paper has explored different notion of FDI quality and argued that it should be included in the empirical studies on spillover analysis. This paper has develop an empirical framework for inclusion of quality dimensions in exploring FDI related spillovers on host country productivity and propose a percentile criterion to distinguish between low and high quality FDI firms in empirical exercises. Since there are several dimensions of FDI quality, the study suggest that the researchers can utilize the principal component analysis (PCA) to build a composite quality index to define low and high quality FDI firms. The empirical exercise on the construction of FDI quality index and related spillover variables for the Indian manufacturing sector shows that there are considerable differences exists between the spillovers variables associated with high and low quality FDI firms. This difference is more pronounced at individual industries level. Unless the differences that are present across foreign firms in terms of quality are brought into the spillover analysis, the obtained results are likely to give misleading conclusions.

Foreign Direct Investment, Externalities and Economic Growth in Developing Countries: Some Empirical Explorations

Foreign direct investment (FDI) emerged as the most important source of external resource flows to developing countries over the 1990s and has become a significant part of capital formation in those countries despite their share in the global distribution of FDI remaining small or even declining. FDI usually flows as a bundle of resources including, as well as capital, production technology, organizational and managerial skills, marketing know-how, and even market access through the marketing networks of multinational enterprises (MNEs) that undertake FDI. These skills tend to spill over to domestic enterprises in the host country. Therefore, FDI can be expected to contribute to growth (more than proportionately) compared to domestic investments in the host country. There is now a body of literature that has analysed the effect of FDI on growth in inter-country frameworks and another analysing knowledge spillovers to domestic enterprises from MNEs (see, for example, De Mello, 1997; Kumar and Siddharthan, 1997; Saggi, 2000, for recent reviews of the literature). However, the mixed findings reached by these studies on the role of FDI inflows in host country growth and on knowledge spillovers from MNEs suggest that these relationships are not unequivocal. A major reason for expecting a more favourable effect of FDI on growth is the externality of MNE entry for domestic firms.

Export-orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications

This paper addresses an important development issue in literature of international production, namely what motivates market‐seeking foreign direct investment (FDI) to undertake export activities. It is well recognized in the concerned literature that export‐oriented FDI is more beneficial for the host country than purely domestic market‐seeking FDI. Hence, many developing countries like India have policy concerns on foreign firms playing a very minimal role in their export activities. Various studies including that of UNCTAD (2003) noted that foreign direct investment (FDI) in Indian manufacturing has been and remains largely domestic market‐seeking. In view of this low export contribution by foreign firms, existing studies suggest that developing countries like India should improve their locational advantages to attract export‐oriented FDI as opposed to local market‐oriented FDI like quality of available infrastructure, availability of cheap but skilled manpower, expanding the size of export processing zones, participation in bilateral/multilateral trade and investment regimes, etc. However, these studies have not examined those factors that could motivate the existing market‐seeking FDI into export activities. The contribution of the present study is precisely to address this issue and identify factors encouraging market‐seeking FDI to take up export activities. The empirical analysis has been conducted in two stages. In the first stage, we have estimated the export shares and export‐orientation of foreign firms in Indian manufacturing across 17 Indian industries over 1991–2005. In the second stage, we have analyzed the impact of five set of factors—size and growth of host country market, local competition, policy regime, import competition and industry‐characteristics on the export‐orientation of foreign firms in Indian manufacturing. The empirical findings from the panel data analysis of 17 Indian industries over 1991–2005 has thrown up several policy implications important for increasing export‐orientation of foreign firms in a developing country like India.