Productivity Spillovers from foreign Direct Investment in the Manufacturing Sector of India

Abstract

The paper studies productivity spillovers from foreign direct investment (FDI) in the manufacturing sector of India. Using firm-level data for the period 2000 to 2010, both horizontal and vertical (backward and forward) spillovers have been tested with the help of panel data fixed effects 'within' model. It is inferred that backward vertical spillovers and forward vertical spillovers positively affect Total Factor Productivity (TFP) of the manufacturing sector. Spillovers through horizontal channels are, however, encountered to be negative. Furthermore, productivity spillovers vary across various industries of the manufacturing sector. Spillovers through backward vertical channels are more pronounced than forward vertical spillovers and horizontal spillovers. The absorptive capacity of the manufacturing sector is also encountered to be weak.