Foreign Direct Investment in Indian Market

Abstract

A number of recent studies examine technology transfer from foreign direct investment (FDI) to India's domestic industrial enterprises. This study goes further by investigating the implications of institutions for the nature of technology spillovers during 2004 - 2013. We examine three institutional features that comprise aspects of India's “special characteristics”: (1) the different sources of FDI, where FDI is nearly evenly divided between mostly Organization for Economic Co-operation and Development (OECD) countries and Mauritius; (2) India's heterogeneous ownership structure, involving state- (SOEs) and non-state owned (non-SOEs) enterprises; and (3) industrial promotion via tariffs or through tax holidays to foreign direct investment. We find robust positive and significant spillovers (as measured by total factor productivity) to domestic firms via backward linkages (the contacts between foreign buyers and local suppliers). Our results suggest varied success with industrial promotion policies. Final goods tariffs as well as input tariffs are negatively associated with firm-level productivity. However, we find statistically significant evidence of stronger productivity spillovers associated with firms that received tax breaks, suggesting that tax holidays were more successful than tariffs as an instrument to promote productivity growth in India.