Journal Press India^®

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This paper examines both primary and secondary spillover effects from foreign firms to domestic firms using a structured framework. Additionally, it investigates whether there is a convergence in single-factor productivity measured through capital and labour productivity between foreign and domestic firms across 13 manufacturing industries in India during the period 2001–2019. Using firm-level data aggregated at the industry level, the study identifies growth patterns in these productivity measures for both foreign and domestic firms within each industry. The findings support the argument that foreign direct investment is crucial for enhancing productivity in host economy. However, these benefits are conditional and unevenly distributed across industries. In fact, one surprising result is that in case of some industries there is a reverse spillover effect from domestic to foreign firms. This shows that in terms of policy India should not blindly follow an open-door policy. The choice of which industry has to be opened up needs deep research and accordingly FDI flows should be allowed.

Keywords

FDI; Productivity; Spillover effects

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