Establishment productivity convergence and the effect of foreign ownership at the frontier

Abstract

Abstract Inward foreign direct investment (FDI) has the potential to be an important conduit for technology transfer to developing countries. However, a large body of empirical research has found that the realized benefit to domestic productivity is minimal. This apparent absence of productivity spillovers from FDI is particularly surprising in light of recent evidence that firms in developing countries exhibit positive productivity convergence, or catch-up, to their industry’s productivity frontier. In this paper, I use establishment level panel data from 21 distinct industries within India’s manufacturing sector from 2001–2015 to provide new evidence on this issue. I analyze establishment total factor productivity conditional convergence and examine if the presence of foreign owned establishments within each industry’s productivity frontier impacts this relationship. While I find statistically and quantitatively significant conditional convergence to the overall frontier, I show that convergence to the foreign owned component of the frontier is markedly slower. I corroborate this finding by exploring the impact of foreign ownership in the frontier on the dynamics of the within industry productivity distribution. This robust result suggests differences in the nature of technology transfer from highly productive domestic and foreign firms. I argue that my general econometric approach helps to reconcile the previously disconnected findings of negligible spillovers from FDI in developing countries with evidence of positive productivity convergence and the substantial presence of foreign firms in the productivity frontier.