Successful Foreign Direct Investment Through the Development of Parts Supply Industries in the Host Country: A Study of India's Automobile Manufacturing Sector

Abstract

Several large multinationals and a few local assemblers dominate the Indian automobile industry. The largest multinational, Maruti Suzuki, entered the Indian automobile industry with a policy of developing local automotive parts manufacturers to achieve high local content ratio. This study seeks to determine the extent to which foreign direct investment (FDI) in host countries contributes to the growth of automobile parts manufacturers. We use district‐level panel data from 2000 to 2008 to assess the linkage between the production of major automobile assemblers and the development of automotive parts suppliers located in the same and adjacent districts to those assemblers. Our regression results show the heterogeneity of the linkages, suggesting that the formation of industrial clusters by local parts suppliers and the expansion of their production capacity are likely to be key determinants of the success of FDI in the Indian automobile industry, rather than relying on in‐house parts production or imports.