Country Origin of Foreign Direct Investment in Indian Manufacturing and Its Impact on Productivity of Domestic Firms



The productivity-enhancing effects of foreign direct investment (FDI) in Indian manufacturing firms are analysed in this paper, focusing particularly on the question, whether the country of origin of FDI makes a difference. Data on about 7000 manufacturing companies drawn from Prowess (CMIE) covering the period from 2000–01 to 2014–15 are used for the analysis. A distinction is made between FDI from developed countries and that from developing countries, and between FDI from USA/Europe and that from Asian countries. The results of the study indicate a positive effect of FDI on firm total factor productivity (TFP). The impact of FDI on TFP of the acquired firm is relatively bigger for FDI from developed countries particularly from USA/Europe. Evidence of a positive FDI productivity spillover to domestic firms is found; there are indications of horizontal spillover and forward linkage vertical spillover. The beneficial horizontal productivity spillover effects of FDI on domestic firms are found to be stronger when the FDI is from developed countries than when it is from developing countries, and when the FDI is from USA/Europe than when it is from countries of Asia. As regards forward linkage vertical spillover, FDI from Asian countries seems to be relatively more beneficial.



The authors are grateful to by Dr. K. S. Chalapati Rao (Institute for Studies in Industrial Development, New Delhi) and Dr. Amrita Goldar (Indian Council for Research in International Economic Relations, New Delhi) for providing valuable data on country of origin of foreign investments in foreign-owned Indian manufacturing firms in India without which this study could not have been done.


  1. Abraham, F., Konings, J., & Slootmaekers, V. (2010). FDI spillovers in the Chinese manufacturing sector. Economics of Transition, 18(1), 143–182.CrossRefGoogle Scholar
  2. Aitken, B. J., & Harrison, A. E. (1999). Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. American Economic Review, 89(3), 605–618.CrossRefGoogle Scholar
  3. Anaya, L. G. (2013). Inter-Industry Productivity Spillovers from Japanese and US FDI in Mexico’s Manufacturing Sector. Technology and Investment, 4, 236–243.CrossRefGoogle Scholar
  4. Arnold, J. M., & Javorcik, B. S. (2009). Gifted kids or pushy parents? Foreign direct investment and plant productivity in Indonesia. Journal of International Economics, 79, 42–53.CrossRefGoogle Scholar
  5. Bandick, R. (2011). Foreign acquisition, wages and productivity. The World Economy, 34(6), 931–951.CrossRefGoogle Scholar
  6. Banga, R. (2004). Impact of Japanese and US FDI on productivity growth. Economic and Political Weekly, 39(5), 453–460.Google Scholar
  7. Behera, S. R., Dua, P., & Goldar, B. (2012a). Foreign direct investment and technology spillover: Evidence across Indian manufacturing industries. Singapore Economic Review, 57(02).Google Scholar
  8. Behera, S. R., Dua, P., & Goldar, B. (2012b). Technology spillover of foreign direct investment: An analysis of different clusters in India. MPRA Paper #43840, University Library of Munich, Germany. Accessed June 6, 2019.
  9. Benfratello, L., & Sembenelli, A. (2006). Foreign ownership and productivity: Is the direction of causality so obvious? International Journal of Industrial Organization, 24(4), 733–751.CrossRefGoogle Scholar
  10. Bergman, A. (2006). FDI and Spillover effects in the Indian pharmaceutical industry. Discussion paper, No. 113. Research and Information System for Developing Countries, New Delhi. Accessed on June 6, 2019.
  11. Bhattacharya, M., Chen, J.-R., & Pradeep, V. (2008). Productivity spillovers in Indian manufacturing firms. No. 30/08. Monash University, Department of Economics. Accessed on June 6, 2019.
  12. Chen, W. (2011). The effect of investor origin on firm performance: Domestic and foreign direct investment in the United States. Journal of International Economics, 83, 219–228.CrossRefGoogle Scholar
  13. Chuang, Y.-C., & Lin, C.-M. (1999). Foreign direct investment, R&D and spillover efficiency: Evidence from Taiwan’s manufacturing firms. The Journal of Development Studies, 35(4), 117–137.CrossRefGoogle Scholar
  14. Demena, B. A., & van Bergeijk, P. A. G. (2017). A meta-analysis of FDI and productivity spillovers in developing countries. Journal of Economic Surveys, 31(2), 546–571.CrossRefGoogle Scholar
  15. Eichler, M., & Lechner, M. (2002). An evaluation of public employment programmes in the East German State of Sachsen-Anhalt. Journal of Labour Economics, 9, 143–186.CrossRefGoogle Scholar
  16. Gelübcke, J. P. W. (2015). The impact of foreign takeovers: comparative evidence from foreign and domestic acquisitions in Germany. Applied Economics, 47(8).Google Scholar
  17. Goldar, B., Banga, R., & Renganathan, V. S. (2004). Ownership and efficiency in engineering firms, 1990–91 to 1999–2000. Economic and Political Weekly, 39(5).Google Scholar
  18. Goldar, B., & Sharma, A. K. (2015). Foreign investment in Indian industrial firms and its impact on firm performance. Journal of Industrial Statistics, 4(1), 1–18.Google Scholar
  19. Guo, Y. (2016). Reexaming FDI horizontal spillover effects on productivity gain of developing countries: Theory and evidence. Paper presented at 2016 Taipei International Conference on Growth, Trade and Dynamics, Osaka University, June 23–24, 2016., Accessed on June 9, 2019.
  20. Haidar, J. I. (2012). Trade and productivity: Self-selection or learning-by-exporting in India. Economic Modelling, 29(5), 1766–1773.CrossRefGoogle Scholar
  21. Harris, R. (2009). Spillover and backward linkage effects of FDI: Empirical evidence for the UK. SERC Discussion Paper no. 16, Spatial Economic Research Center, London School of Economics and Political Science, London. Accessed on June 6, 2019.
  22. Harris, R., & Robinson, C. (2002). The impact of foreign acquisitions on total factor productivity: Plant-level Evidence from UK manufacturing, 1987–1992. Review of Economics and Statistics, 84, 562–568.CrossRefGoogle Scholar
  23. Harris, R., & Robinson, C. (2003). Foreign ownership and productivity in the United Kingdom: Estimates for UK manufacturing using the ARD. Review of Industrial Organisation, 22, 207–223.CrossRefGoogle Scholar
  24. Havranek, T., & Irsova, Z. (2011). Estimating vertical spillovers from FDI: Why results vary and what the true effect is. Journal of International Economics, 85, 231–244.CrossRefGoogle Scholar
  25. Ito, B., Yashiro, N., Xu, Z., Chen, X., & Wakasugi, R. (2010). How do Chinese industries benefit from FDI spillovers? RIETI Discussion Paper Series 10-E-026. Accessed on June 6, 2019.
  26. Javorick, B. S. (2004). Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. American Economic Review, 94(3), 605–627.CrossRefGoogle Scholar
  27. Javorick, B. S., & Spatareunu, M. (2011). Does it matter where you come from? Vertical spillovers from foreign direct investment and the origin of investors. Journal of Development Economics, 96(1), 126–138.CrossRefGoogle Scholar
  28. Jefferson, G. H., & Ouyang, M. (2014). FDI spillovers in China: why do the research findings differ so much? Journal of Chinese Economic and Business Studies, 12(1).Google Scholar
  29. Jordaan, J. A. (2008). Intra-and inter-industry externalities from foreign direct investment in the Mexican manufacturing sector: New evidence from Mexican regions. World Development, 36(12), 2838–2854.CrossRefGoogle Scholar
  30. Kaitila, V., McQuinn, J., Siedschlag, I., & Zhang, X. (2013). International investment and firm performance: Empirical evidence from small open economies. ETLA Report no. 6, The Research Institute of the Finnish Economy. Accessed on June 4, 2019.
  31. Karpaty, P. (2004). Are foreign owned-firms more productive? Evidence from Swedish firm data, Working Paper no. 6, Örebro University. Accessed on June 5, 2019.
  32. Karpaty, P. (2007). Productivity effects of foreign acquisitions in Swedish manufacturing: The FDI productivity issue revisited. International Journal of Economics of Business, 14(2).Google Scholar
  33. Kathuria, V. (2001). Foreign firms, technology transfer and knowledge spillovers to Indian manufacturing firms—A stochastic frontier analysis. Applied Economics, 33(5), 625–642.CrossRefGoogle Scholar
  34. Kathuria, V. (2002). Liberalisation, FDI, and productivity spillovers—An analysis of Indian manufacturing firms. Oxford Economic Papers, 54(4), 688–718.CrossRefGoogle Scholar
  35. Kathuria, V. (2010). Does the technology gap influence spillovers? A post-liberalization analysis of Indian manufacturing industries. Oxford Development Studies, 38(2), 145–170.CrossRefGoogle Scholar
  36. Khalifah, N. A., & Adam, Radziah. (2009). Productivity spillovers from FDI in Malaysian manufacturing: Evidence from micro-panel data. Asian Economic Journal, 23(2), 143–167.CrossRefGoogle Scholar
  37. Klein M. A. (2017). Technological catch-up and productivity spillovers from FDI: Evidence from Indian manufacturing. Accessed on June 3, 2019.
  38. Kokko, A. (1994). Technology, market characteristics, and spillovers. Journal of Development Economics, 43(2), 279–293.CrossRefGoogle Scholar
  39. Kokko, A. (1996). Productivity spillovers from competition between local firms and foreign affiliates. Journal of International Development, 8(4), 517–530.CrossRefGoogle Scholar
  40. Kokko, A., Tansini, R., & Zejan, M. C. (1996). Local technological capability and productivity spillovers from FDI in the Uruguayan manufacturing sector. Journal of Development Studies, 32(4), 602–611.CrossRefGoogle Scholar
  41. Levinsohn, J., & Petrin, A. (2003). Estimating production functions using inputs to control for unobservables. Review of Economic Studies, 70(2), 317–342.CrossRefGoogle Scholar
  42. Li, D., Lu, Y., & Ng, T. (2009). Foreign ownership and firm productivity: Causality and channels. Accessed on June 3, 2019.
  43. Liu, Q., & Qiu, L. D. (2017). Foreign acquisitions and target firms’ performance in China. World Economy, 40(1), 2–20.CrossRefGoogle Scholar
  44. Long, C. X., Hale, G., & Miura, H. (2014). Productivity spillovers from FDI in the People’s Republic of China: A nuanced view. Asian Development Review, 31(2), 77–108.CrossRefGoogle Scholar
  45. Malik, S. K. (2011). Conditional technology spillovers from foreign direct investment evidence from Indian manufacturing industries. Paper presented at 13th Conference on Money and Finance, Indira Gandhi Institute of Development Research, Mumbai. Accessed June 3, 2019.
  46. Marin, A., & Sasidharan, S. (2010). Heterogeneous MNC subsidiaries and technological spillovers: Explaining positive and negative effects in India. Research Policy, 39(9), 1227–1241.CrossRefGoogle Scholar
  47. Mebratie, A. D., & Bedi, A. S. (2013). Foreign direct investment, black economic empowerment and labour productivity in South Africa. Journal of International Trade & Economic Development, 22(1), 103–128.CrossRefGoogle Scholar
  48. Mishra, B. R. (2011). Spillover effects of foreign direct investment: An econometric study of Indian firms. MPRA paper #37759. Accessed on October 10, 2017.
  49. Monastiriotis, V. (2014). Origin of FDI and domestic productivity spillovers: Does European FDI have a ‘productivity advantage’ in the ENP countries?” LEQS Paper No. 70/2014, LSE ‘Europe in Question’ Discussion Paper Series, London School of Economics and Political Science. Accessed June 5, 2019.
  50. Monastiriotis, V., & Alegria, R. (2011). Origin of FDI and domestic spillovers: The case of Greek and European FDI in Bulgaria. Review of Development Economics, 15(2), 150–166.CrossRefGoogle Scholar
  51. Mondal, S., & Pant, M. (2014). FDI and firm competitiveness: Evidence from Indian manufacturing. Economic and Political Weekly, 49(38), 56–64.Google Scholar
  52. Mondal, S., & Pant, M. (2018). Firm capabilities and productivity spillovers from FDI: Evidence from Indian manufacturing firms. In N. Siddharthan & K. Narayanan (Eds.), Globalisation of technology. India studies in business and economics. Singapore: Springer.Google Scholar
  53. Newman, C., Rand, J., Talbot, T., & Tarp, F. (2015). Technology transfers, foreign investment and productivity spillovers. European Economic Review, 76, 168–187.CrossRefGoogle Scholar
  54. Nguyen, L.P. (2008). Productivity spillovers from foreign direct investment: Evidence from Vietnamese Firm Data. School of Commerce, University of South Australia. Accessed June 4, 2019.
  55. Ni, B, Spatareanu, M., Manole, V., Otsuki, T., & Yamada, H. (2015). How will the origin of FDI affect domestic firms’ TFP?—Evidence from Vietnam. Accessed on October 17, 2017.
  56. Olley, G. S., & Pakes, A. (1996). The dynamics of productivity in the telecommunications equipment industry. Econometrica 64, 1263–1297.Google Scholar
  57. Pant, M., & Mondal, S. (2010). FDI, technology transfer and spillover: A case study of India. Discussion Paper no. 10-04, Centre for International Trade and Development, School of International Studies, Jawaharlal Nehru University, New Delhi. Accessed on June 2, 2019.
  58. Petkova, N. (2012). The real effects of foreign investment: Productivity and growth. SSRN Paper. Accessed October 10, 2017.
  59. Petrin, A., Poi, B. P., & Levinsohn, J. (2004). production function estimation in Stata using inputs to control for unobservables. Stata Journal, 4, 113–123.CrossRefGoogle Scholar
  60. Pfaffermayr, M., & Bellak, C. (2002). Why foreign-owned firms are different: A conceptual framework and empirical evidence from Austria. In R. Jungnickel (Ed.), Foreign-owned firms. London: Palgrave Macmillan.Google Scholar
  61. Sahu, P. K., & Solarin, S. A. (2014). Does higher productivity and efficiency lead to spillover? Evidence from Indian manufacturing. Journal of Developing Areas, 48(3), 175–193.CrossRefGoogle Scholar
  62. Sasidharan, S. (2006). Foreign direct investment and technology spillovers: Evidence from the Indian manufacturing sector. Working paper no. 2006-010, United Nations University, Maastricht Economic and Social Research and Training Centre on Innovation and Technology, Maastricht, The Netherlands.Google Scholar
  63. Sasidharan, S., & Ramanathan, A. (2007). Foreign direct investment and spillovers: Evidence from Indian manufacturing. International Journal of Trade and Global Markets, 1(1), 5–22.CrossRefGoogle Scholar
  64. Siddharthan, N. S., & Lal, K. (2004). Liberalisation, MNE and productivity of Indian enterprises. Economic and Political Weekly, 39(5), 448–452.Google Scholar
  65. Sjöholm, F. (1999). Technology gap, competition and spillovers from direct foreign investment: Evidence from establishment data. Journal of Development Studies, 36(1), 53–73.CrossRefGoogle Scholar
  66. Takii, S. (2009). Multinationals, technology upgrading, and wages in urban and rural Indonesia. Review of Development Economics, 13(1), 151–163.CrossRefGoogle Scholar
  67. Takii, S., & Narjok, D. A. (2012). FDI forward linkage effect and local input procurement—Evidence from Indonesian manufacturing. In C. H. Hahn, & D. A. Narjoko (Eds.), Dynamics of firm selection process in globalized economies. ERIA Research Project Report 2011 no. 3 (pp. 111–146). Accessed June 6, 2019.
  68. Te Velde, D. W. (2019). Enhancing spillovers from foreign direct investment. Supporting Economic Transformation Report, Overseas Development Institute (ODI), London. Accessed June 5, 2019.
  69. Thakur, P., & Burange, L. G. (2015). Productivity spillovers from foreign direct investment in the manufacturing sector of India. Artha Vijnan, 57(1), 1–20.CrossRefGoogle Scholar
  70. Van Thanh, H., & Hoang, P.T. (2010). Productivity spillovers from foreign direct investment: The case of Vietnam. In C. H. Hahn & D. Narjoko (Eds.), Causes and consequences of globalization in East Asia: What do the micro data analyses show? (pp. 228–246). ERIA Research Project Report 2009-2. Jakarta: ERIA. Accessed June 3, 2019.
  71. Xu, X., & Sheng, Y. (2012). Productivity spillovers from foreign direct investment: Evidence from firm-level data in China. World Development, 40(1), 62–74.CrossRefGoogle Scholar
  72. Zanfei, A., Coveri, A., & Pianta, M. (2019). FDI patterns and global value chains in the digital economy. Working Papers 1903, University of Urbino Carlo Bo, Department of Economics, Society & Politics. Accessed on June 6, 2019.
  73. Zhang, Y., Li, H., Li, Y., & Zhou, L. (2010). FDI spillovers in an emerging market: The role of foreign firms’ country origin diversity and domestic firms’ absorptive capacity. Strategic Management Journal, 31, 969–989.Google Scholar

Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  1. 1.Institute of Economic GrowthNew DelhiIndia
  2. 2.International Economic Development GroupOverseas Development InstituteLondonUK

Personalised recommendations