Impact of Foreign Direct Investment (FDI) Inflows on Productivity: Evidence from Panel Data Analysis

By : Pabitra Kumar Jena , Utpal Chattopadhyay

Page No: 246-256

Abstract
The present study aims to analyse the impact of FDI inflows on productivity in India. The study reviewed some of the earlier works on impact of FDI inflows on productivity during pre- and postglobalization period. These studies found that the impact of FDI inflows on productivity is mixed, i.e., both positive and negative. The studies observed that varied results depend on characteristics of the host country and the investing firms. Factors such as ‘absorptive capability’ of the host economy, domestic market competition, ownership structure of foreign firms and technology gap between foreign and domestic firms in the industry can explain the different outcomes. Absorptive capability refers to the fact that FDI may be more beneficial for an industry if the domestic firms have a minimum level of technological development and human capital. Since competition effects foreign firm; it can lead to crowding out of domestic firms which are forced to make an exit being unable to compete with the foreign firms. This study found that impact of FDI inflows on productivity is positive in case of manufacturing sector as well as service sector firms. Empirical evidence showed that both manufacturing and service sectors have positive Total Factors Productivity Growth (TFPG). The positive growth of TFPG in both sectors is mainly due to Technical Efficiency Change (TEC). The manufacturing sector however is having more TEC in comparison with service sector. The higher TEC in manufacturing sector is due to both Pure Technical Efficiency Change (PTEC), which is also known as managerial efficiency, and Scale Efficiency Change (SEC) which is also known as size efficiency. But TEC in service sector is due to PTEC (managerial efficiency) and not SEC (size efficiency). Further, the paper goes on to discuss the limitations of the present study and scope for further research. Finally, some policy suggestions for better inflows of FDI in India are spelt out.

Authors :
Pabitra Kumar Jena : Assistant Professor, School of Economics, Shri Mata Vaishno Devi University, Jammu & Kashmir, India.
Utpal Chattopadhyay : Associate Professor, National Institute of Industrial Engineering (NITIE), Mumbai.