Cherry-Picking or Lemon-Grabbing? Investigating FDI in Indian Manufacturing Firms

Abstract

This article is a contribution to the literature that investigates the motives of foreign investors while investing in the domestic firms. We argue that in India, both positive and negative selection theories can be consistent in the backdrop of the asymmetry of information in foreign investment. Foreign investors seem to focus on observable variables like profit and stability over time to cherry pick their target firms. However, it appears that they invest in some firms that are lemons in other dimensions, such having low total factor productivity (TFP). These firms may also be attractive because they have the potential to be more productive. These findings are important to further investigate the role and nature of FDI in India.