Local firms productivity spillover from foreign direct investment: a study of Indian manufacturing industries

Abstract

This paper examines the local firms productivity spillover from foreign direct investment (FDI) based on a cross-industry analysis of Indian manufacturing. The results are based on dynamic panel models and indicate that foreign presence itself raises the local firm’s labour productivity within an industry. Nevertheless, the technology spillover is conditioned by the nature of the trade policy regime. We find that after trade policy liberalisation in India, industries which experienced a decline in the tariff cost exhibited stronger growth in domestic firms’ labour productivity. A key policy implication is that liberalising the tariff protection could maximise the gains from FDI-technology spillover.