FDI spillovers and local productivity growth: evidence from Indian pharmaceutical industry

Pradhan, Jaya Prakash (2004): FDI spillovers and local productivity growth: evidence from Indian pharmaceutical industry. Published in: Artha Vijnana , Vol. XLIV, No. 3-4 (2002): pp. 317-332.

Abstract

The study tests the FDI spillover hypothesis in the Indian Pharmaceutical industry using an unbalanced panel data for a sample of firms over the period 1989-90 to 2000-01. The study estimates firm-specific productive efficiency growth for domestic firms from frontier production function and relates the same to a set of firm-specific attributes along with the variables of foreign presence. The study found that the presence of foreign firms per se may not be important for productivity growth of domestic firms unless it is complemented by the latter’s R&D activity or size. Therefore, the study concludes that policy efforts to encourage R&D and some concentration of size of the domestic firms in the industry may be more desirable than passively liberalizing the FDI policy from the point of view of increasing productive efficiency of local enterprises.

• Item Type: MPRA Paper
• Language: English
• Keywords: FDI; Productivity; Pharmaceutical Industry
• Subjects: L - Industrial Organization > L6 - Industry Studies: Manufacturing > L65 - Chemicals ; Rubber ; Drugs ; Biotechnology; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity

References

Aitken, B. J. and A. E. Harrison (1999) ‘Do Domestic Firms Benefit from Direct Foreign Investment? Evidence from Venezuela’, American Economic Review, 89, pp. 605-618.

Blomström, M and F. Sjöholm (1999) ‘Technology Transfer and Spillovers: Does Local Participation with Multinationals Matter?’, European Economic Review, 43, pp. 915-923.

Blomström, M. (1986) ‘Foreign Investment and Productive Efficiency: The Case of Mexico’ Journal of Industrial Economics, Vol. 35, pp. 97-112.

Blomström, M. and A. Kokko (1998) ‘Multinational Corporations and Spillovers’, Journal of Economic Surveys, 12, pp. 247-277.

Blomström, M. and E. N. Wolff (1994) ‘Multinational Corporations and Productivity Convergence in Mexico’, in W.J. Baumol, R. R. Nelson and E. N. Wolff (edts.) Convergence of Productivity: Cross National Studies and Historical Evidence. Oxford: Oxford University Press, pp. 263-283.

Blomström, M. and H. Persson (1983) ‘Foreign Investment and Spillover Efficiency in an Underdeveloped Economy: Evidence from the Mexican Manufacturing Industry’, World Development, 11, pp. 493-501.

Bosco, M. G. (2001) ‘Does FDI Contribute to Technological Spillovers and Growth? A Panel Data Analysis of Hungarian Firms’, Transnational Corporations, 10, pp. 43-68.

Caves, R.E. (1974) ‘Multinational Corporations, Competition and Productivity in Host-Country Markets’, Economica, 41, pp.176-193.

Chuang, Y-C and C-M Lin (1999) ‘Foreign Direct Investment, R&D and Spillover Efficiency: Evidence from Taiwan's Manufacturing Firms’, Journal of Development Studies, 35, pp. 117-137.

Cornwell, C., Schmidt, P. and Sickles, R.C. (1990) ‘Production Frontier with Cross-Section and Time-Series Variation in Efficiency Levels’, Journal of Econometrics, 46, pp.185-200.

Desai, A. V. (1980) ‘The Origin and Direction of Industrial R&D in India’, Research Policy, 9, pp.74-96.

Dimelis, S. and H. Louri (2001) ‘Foreign Direct Investment and Efficiency Benefits: A Conditional Quantile Analysis’, CEPR Discussion Paper, DP-2868.

Djankov, S. and B. Hoekman (2000) ‘Foreign Investment and Productivity Growth in Czech Enterprises’, World Bank Economic Review, 14, pp. 49-64.

Girma, S. and K. Wakelin (2000) ‘Are there Regional Spillovers from FDI in the UK?’, GEP Research Paper, No. 16, University of Nottingham.

Girma, S. and K. Wakelin (2001) ‘Regional Underdevelopment: Is FDI the Solution? A Semiparametric Analysis’, GEP Research Paper, No.11, University of Nottingham.

Girma, S., D. Greenaway and K. Wakelin (2001) ‘Who Benefits from Foreign Direct Investment in the UK?’, Scottish Journal of Political Economy, 48, pp. 119-133.

Girma, S., D. Greenaway and R. Kneller (2002) ‘Does Exporting Lead To Better Performance? A Microeconometric Analysis of Matched Firms’, Leverhulme Centre for Research on Globalisation and Economic Policy, University of Nottingham, (mimeo).

Globerman, S. (1979) ‘Foreign Direct Investment and Spillover Efficiency Benefits in Canadian Manufacturing Industries’, Canadian Journal of Economics, 12, pp. 42-56.

Görg, H. and D. Greenaway (2001) ‘Foreign Direct Investment and Intra-Industry Spillovers: A Review of the Literature’, GEP Research Paper, No.37, University of Nottingham.

Griliches, Z. (1975) ‘Returns to Research and Development Expenditures in the Private Sector’, Reprinted in Z. Griliches (1998) R&D and Productivity: The Econometric Evidence, pp. 49-81, Chicago: University of Chicago Press.

Griliches, Z. (1986) ‘Productivity, R&D, and Basic Research at the Firm Level in the 1970s’, American Economic Review, 76, pp.141-154.

Griliches, Z. and J. Mairesse (1984) ‘Productivity and R&D at the Firm Level’, in Z. Griliches (ed.) R&D, Patents, and Productivity, pp. 339-374, Chicago: University of Chicago Press.

Haddad, M. and A. Harrison (1993) ‘Are there Positive Spillovers from Direct Foreign Investment? Evidence from Panel Data for Morocco’, Journal of Development Economics, 42, pp. 51-74.

Kathuria, V. (2000) ‘Productivity Spillovers from Technology Transfer to Indian Manufacturing Firms’, Journal of International Development, 12, pp. 343-369.

Kinoshita, Y. (2001) ‘R&D and Technology Spillovers through FDI: Innovation and Absorptive Capacity’, CEPR Discussion Paper, DP-2775.

Kokko, A. (1994) ‘Technology, Market Characteristics, and Spillovers’, Journal of Development Economics, 43, pp. 279-293.

Kokko, A. (1996) ‘Productivity Spillovers from Competition between Local Firms and Foreign Affiliates’, Journal of International Development, 8, pp. 517-530.

Kokko, A., M. Zejan and R. Tansini (2001) ‘Trade Regimes and Spillover Effects of FDI: Evidence from Uruguay’, Weltwirtschaftliches Archiv, 137, pp. 124-149.

Kokko, A., R. Tansini and M. C. Zejan (1996) ‘Local Technological Capability and Productivity Spillovers from FDI in the Uruguayan Manufacturing Sector’, Journal of Development Studies, 32, pp. 602-611.

Konings, J. (2001) ‘The Effects of Foreign Direct Investment on Domestic Firms: Evidence from Firm Level Panel Data in Emerging Economies’, CEPR Discussion Paper, DP-2586.

Kraay, A. (1999), Exports and Economic Performance: Evidence from a Panel of Chinese Enterprises, World Bank (mimeo).

Kumar, N. and J. P. Pradhan (2003) ‘Economic Reforms, WTO and Indian Drugs and Pharmaceuticals Industry: Implications of Emerging Trends’ CMDR Monograph Series, No. 42, Centre for Multidisciplinary Development Research, Dharwad.

Liu, X., P. Siler, C. Wang and Y. Wei (2000) ‘Productivity Spillovers from Foreign Direct Investment: Evidence from UK Industry Level Panel Data’, Journal of International Business Studies, 31, pp. 407-425.

Marksun, J. R. and A. J. Venables (1997) ‘Foreign Direct Investment as A Catalyst For Industrial Development’, NBER Working Paper, No.6241, NBER, Massachusetts Avenue, Cambridge.

Pradhan, J. P. (2002) ‘Liberalization, Firm Size and R&D Performance: A Firm Level Study of Indian Pharmaceutical Industry’, Journal of Indian School of Political Economy, 14, pp. 647-665.

Sjöholm, F. (1999a) ‘Technology Gap, Competition and Spillovers from Direct Foreign Investment: Evidence from Establishment Data’, Journal of Development Studies, 36, pp. 53-73.

Sjöholm, F. (1999b) ‘Productivity Growth in Indonesia: The Role of Regional Characteristics and Direct Foreign Investment’, Economic Development and Cultural Change, 47, pp. 559-584.

UNCTAD (1999) World Investment Report: Foreign Direct Investment and the Challenge of Development, New York.

World Bank (1997) Malaysia: Enterprise Training, Technology and Productivity, A World Bank Country Study, Washington, D.C.