1、1FOREIGN DIRECT INVESTMENT SPILLOVERS AND EXPORT PERFORMANCE EVIDENCE FROM INDIAN MANUFACTURING INDUSTRY AFTER LIBERALIZATIONT.J. Joseph*V. Nagi Reddye-mail: AbstractThe spillovers from foreign direct investment (FDI) through multinational enterprises (MNEs) have attracted considerable attention in
2、recent times. MNEs, with their technological and managerial skills and knowledge about international marketing conditions, are expected to improve the productivity as well as export performance of host country firms by creating certain positive externalities known as spillovers. Spillovers can take
3、place when the presence of MNEs improves the productive efficiencies of domestic firms, making their products efficient in price and quality in the international market and thus improving their export performance. Such spillovers may occur either to domestic firms in the same industry group of forei
4、gn firms through competition, known as horizontal spillovers, or to firms in the upstream supply chain through buyer-supplier linkages, known as backward spillovers. The existing empirical studies on FDI spillovers largely look at the productivity enhancing effects of such spillovers. These studies
5、mostly examine the horizontal spillovers in the same industry sector of foreign firms and ignore the possibility of spillovers through buyer-supplier or backward linkages. The present study examines the impact of horizontal as well as backward spillovers from the presence of foreign firms on the exp
6、ort performance of domestic firms in Indian manufacturing industry after the economic liberalization of 1991.Using robust regression estimation methods the study has not found any significant spillover effects from the presence of foreign firms on the export performance of domestic firms in Indian m
7、anufacturing industry. The results also indicate that domestic firms are not benefited in improving their export performance through any buyer-supplier linkages with the MNEs. The study shows that India has attracted more domestic market seeking FDI than export-oriented one.Keywords: Foreign direct
8、investment, multinational enterprises, export performance, horizontal spillovers, backward spillovers.JEL Classification: F23, F14, L60, L25* Post Doctoral Fellow at ICFAI Institute for Management Teachers (IIMT), Hyderabad. Professor, ICFAI Institute for Management Teachers (IIMT), Hyderabad.2INTRO
9、DUCTIONThe extent of globalization of a countrys economy is usually evaluated from its trade and investment relations with rest of the world, especially the volume and growth of trade from that country. Exports help the firms to achieve greater efficiency in production through economies of scale due
10、 to increased market size. Studies also point out that exporting may also improve the innovative activities of the firm, with new technologies, new products and new methods of delivery to be competitive in quality and to stay in the business (see for example Agarwal, 2002, Kumar and Pradhan, 2003).
11、Sjoholm (1999) points out that for an exporter to be successful in foreign market, it requires good knowledge about the foreign market conditions such as foreign preferences, regulations, distribution channels and other market characteristics. However, collecting information on some of the above men
12、tioned variables may be usually costly and this may deter the entry of firms into foreign market. Sjoholm indicates that there can be substantial reduction in sunk entry cost with various types of foreign contacts since such contacts may provide knowledge on foreign conditions. There are different c
13、hannels where foreign contacts can take place. The most important channel of such foreign contacts is through the foreign direct investment (FDI) by multinational enterprises (MNEs). MNEs typically have a presence in many markets, making them a potential source of information about foreign markets,
14、consumers and technology. Therefore, higher foreign equity participation by MNEs may lead to higher export performance. This impact on exports of domestic firms is through direct contact with the multinationals (a direct effect). Sometimes the presence of MNEs in the domestic market itself would inc
15、rease the export performance of domestic firms (an indirect effect). The information of MNEs on foreign markets may leak out to the domestic firms even if they do not participate in joint ventures with foreign firms. This externality is one type of spillovers from FDI. Spillovers can also take place
16、 when the presence of MNEs improves the productive efficiencies of domestic firms, making their products efficient in price and quality in the international market and thus improving their export performance. These types of spillovers are known as horizontal spillovers since it occurs to domestic fi
17、rms in the 3same industry group of foreign firms through competition. Similarly, the foreign buyers of intermediate goods may provide information about other possible international purchasers of those products, so that the intermediate goods producers can expand their production and achieve the econ
18、omies of scale that will in fact reduce the price of their products. This aspect of spillovers from foreign firms arising through buyer-supplier linkages are mostly known as backward spillovers.The literature classifies FDI based on MNEs market strategy into domestic market-seeking and export-orient
19、ed. MNEs may invest abroad to benefit from their ownership-specific proprietary advantages and location factors that will provide high rates of return in the host economy. Most of the developing countries (like China, Malaysia, Indonesia, Thailand, etc) are now mostly looking at export-oriented FDI
20、to strengthen their export competitiveness. Moreover, Pradhan and Abraham (2005) argue that export-oriented FDI can be expected to generate strong links with local economy compared to local market-oriented FDI in the host country specifically because it is motivated to exploit the location advantage
21、s offered by the host country like low-cost labour, raw materials, components, parts, among others. The presence of export-oriented FDI and the interaction with them may induce the domestic firms to diversify into export market when information on foreign markets brought in by foreign firms spill ov
22、er to them. While local market oriented FDI may crowd out domestic firms and investments, export-oriented FDI can stimulate investment by generating demands for intermediate goods (Pradhan and Abraham, 2005). The experience of countries like China and Mexico shows that these countries were able to i
23、ncrease their international market shares mostly by attracting export-oriented FDI (UNCTAD 2002). Therefore, it is expected that spillover effects will be larger from the presence of more export-oriented MNEs compared to domestic market seeking ones.However, such type of growth-led, efficiency seeki
24、ng and export-oriented FDI can be materialized only if the regulatory regime facilitates greater freedom to the MNEs in their operations (Athreye and Kapur, 2001; Aggrawal, 2002). According to Aggrawal (2002, p.122) “In a protective regime MNEs may not be motivated to transfer new technologies 4to t
25、heir affiliates due to the absence of competition and government regulations regarding foreign equity ownership holdings and local content requirements on FDI.” She also pointed out that protected regimes or regulated markets are more likely to attract tariff-jumping FDI and therefore, more domestic
26、 market-seeking. Economic liberalization through opening up of economy will force the tariff-jumping, market-seeking type of MNEs to restructure their strategies due to increased competition from imports, new foreign firms and diligent indigenous firms. The existing MNE-affiliates have to look at te
27、chnology upgradation either through technology imports or through more research and development (R Kumar and Pradhan, 2003). Aggarwal (2002) compared the export performance of MNE affiliates and domestic firms in Indian manufacturing after the 1991 liberalization by analyzing the determinants of the
28、ir export intensities. The study examined the relationship between FDI and export performance using Tobit model for 916 Indian manufacturing firms for the period 1996-2000. Aggarwal found that the liberalization measures of the 1990s enhanced the export-role of MNE affiliates, especially in the late
29、 1990s. However, she could not find any evidence of positive relationship between foreign equity share and export performance of firms.Kumar and Pradhan (2003) looked at the important factors that influence the export competitiveness of Indian manufacturing firms with emphasis on knowledge-based ind
30、ustries. They found that younger firms drive export competitiveness in the high technology and low technology industries whereas in the medium technology industries See Heckman (1981)8older firms are more competitive. The study also found that foreign affiliates are better achievers on export front
31、compared to their domestic counterparts in Indian manufacturing. The study concluded that the liberalization policies of 1990s have definitely improved the export competitiveness of Indian manufacturing, especially technology-intensive segments. Banga (2003) also found a significant impact of FDI on
32、 the export-intensity of non-traditional export industries in India. In a descriptive analysis of firm-level data for Indian manufacturing firms for the period from 1989-90 to 2000-01, Pradhan and Abraham (2005) found that foreign firms having 65-75 and 40-55 per cent of ownership tend to export mor
33、e as a percentage of sales than any other group. Using a simple Tobit analysis for the same data they found that firms with modest levels of foreign equity participation have shown higher export performance following the implementation of economic reforms. However, firms with majority foreign owners
34、hip have not yet shown any significant improvement in their export behavior, supporting the earlier findings that firms with larger foreign equity participation in Indian manufacturing are relatively local market oriented. They also found that the government scheme of export promotion offering fisca
35、l benefits have played an instrumental role in the export performance of foreign affiliates. Most of these studies examined the role of foreign equity participation in the export decision of firms in Indian manufacturing and merely compared the export performance of domestic and foreign firms withou
36、t looking into the possibilities of export-spillovers from foreign firms. This study attempts to analyze the effect of foreign ownership as well as the FDI spillovers on the export performance of Indian firms in a liberalized framework.METHODOLOGY AND DATAMethodologyThis study uses econometric model
37、s to estimate the effect of foreign ownership and FDI spillovers on firm-level export performance. To examine the impact of FDI spillovers on domestic firms export performance, the domestic firms are considered separately.9It should be noted that it is not easy to separate the influence of FDI spill
38、overs on the export performance of a firm since export behavior of a firm is not a simple function of the foreign presence. Many other factors that are firm-specific or industry-specific do exert a deterministic influence on the firm-level export performance. Following the earlier literature this st
39、udy also, therefore, tries to incorporate some of the other important factors (or controlled variables) such as firms size, capital intensity, R Kumar and Pradhan, 2003). However, this study does not use the age of the firm in years but instead incorporates a dummy variable to demarcate the export b
40、ehavior of firms incorporated before the major export promotion policies of 1983 and firms incorporated after.Firm Size: The size of the firm is expected to positively influence the export performance of the firm because of its significant economies of scale (Caves, 1996; Ruane and Sutherland, 2004)
41、. Large firms are relatively likely to export more because they may enjoy decreasing average cost (economies of scale) due to their size which may make their products more price-competitive in export market. Ruane and Sutherland (2004) points out that, relatively larger enterprises are more capable
42、of absorbing any fixed costs associated with entering into an export market and to exploit economies of scale in the exporting process. Another argument is that large establishments have been relatively successful in the domestic market, which could increase the possibility to succeed internationall
43、y (Sjoholm, 1999). This study considers the market share of firms in their respective industries as a proxy for their size. An advantage in using market share as the size variable is that it will take care of any industry-specific bias. 10Capital Intensity: High capital intensity is supposed to have
44、 positive effects on the quality of the products and, perhaps, on the ability to export (Sjoholm, 1999). However, Kumar and Siddharthan (1994) consider that a higher capital intensity of operations is unlikely to give the firm a competitive advantage in developing country setting as in India with la
45、bour abundance and relative scarcity of capital.Technology: Technology intensity is supposed to capture the quality of the product, which is a major factor for export competency. Technology can be either from own-R Aggrawal, 2002; Kumar and Pradhan, 2003) found firm size as an important determinant
46、of export intensity of firms. As reported earlier, the market share of each firm in their respective industry group is taken as a proxy for the size. Significant positive sign implies that firms with higher market share in their industry are more export-oriented since they have dominance on other fi
47、rms and enjoying economies of large size. The coefficient of AGE variable is also statistically significant with positive sign in all the time periods and in all the specifications of the model. This dummy variable indicates that the manufacturing firms incorporated before the export-oriented polici
48、es of 1983 are superior in their export performance compared to firms incorporated after that period. It also indicates that the accumulated learning of firms have a significant influence on their export performance. The capital intensity (CAPINT) variable is not statistically significant in any of
49、the time periods, except for the period 2001-2004 at 10 per cent level taking the foreign firms exports as spillover variables and without introducing the industry dummies. This implies that, in India still the labour-intensive products are capturing export market. The technology factors that may influence the export performance of firms are examined using R&D intensity (RADINT) and technology import intensity (TIMINT) of firms. The coefficients of both these variables are positive with a high level of statistical significance in almost all the time peri
