Direction of Outward FDI of Indian Manufacturing Firms: Influence of Technology and Firm Productivity

Abstract

This chapter deals with India’s outward foreign investment (OFDI) flows, investigating econometrically whether the direction of OFDI of Indian manufacturing firms is related to their technical competence and level of productivity. The theoretical model of Aw and Lee (J Int Econ 76:403–415, 2008) is taken as the basic framework for the analysis. Data for about 2400 Indian manufacturing firms are used for the analysis. The data relate to the year 2007–08 or thereabout. The econometric results indicate that a firm with a relatively high level of productivity is more likely to invest abroad than a firm with relatively low productivity. However, the type of relationship between firm productivity and direction of FDI that is expected on the basis of the Aw-Lee model and their empirical findings for Taiwanese electronics firms is not found in the analysis of data on Indian manufacturing firms. The econometric results do not show that the Indian firms that invest in industrialized countries have significantly higher productivity than the firms that invest in developing countries, which is a prediction of the Aw-Lee model. The results for the technology related variables, on the other hand, do provide some support to the Aw-Lee model. There are indications from the econometric results that a relatively greater engagement with technology acquisition activities among Indian firms is associated with investment in industrialized countries. One interpretation of this empirical finding is that the technical competence of a firm is an important factor determining whether it will invest in an industrialized country.