Regional foreign direct investment and technology spillover: Evidence across different clusters in India

Abstract

This paper examines whether there exist productivity spillovers from foreign direct investment (FDI) to domestic firms at the regional level, using firm-level panel dataset covering 22 manufacturing industries in India from 2000 to 2012. In order to estimate the productivity spillovers from FDI at the regional level, we select 10 industrial clusters across 4 regions in India. In estimating productivity, we control for a possible simultaneity bias by using semi-parametric estimation techniques. We find that local firms benefit from horizontal and vertical FDI, but the benefits from the latter are found to be substantially stronger. The absorptive capacity of domestic firms is highly relevant to harvest the spilled technology from foreign-owned firms. Furthermore, we find that domestic firms belonging to high-technology industries benefit more from FDI at the regional level. We also find that market concentration is a crucial conduit for firm innovation, technological upgradation, and having a direct effect on local firm total factor productivity.