Foreign Firms and Inter-industry Spillovers in Indian Manufacturing

Abstract

Foreign direct investment (FDI) has benefits both for the host country and the home country. Multinational corporations or foreign firms are supposed to have frontier technology, which are expected to have spillover effects on local firms when they enter a country. Most studies on Indian industry have focused on intra-industry spillovers and have found some evidence of this. The present study's focus is on inter-industry spillovers (for example, from auto-components to assemblers) on which there are few studies, as the literature unambiguously expects inter-industry spillovers to occur. This paper establishes the presence of spillover effects on domestic firms due to horizontal, backward and forward linkages with foreign firms in the Indian manufacturing industry, which affect domestic firms’ productivity. It also establishes that inter-industry spillovers are negative for some industries.