FDI, Firm Heterogeneity and Exports:
An examination of evidence in India
Maitri Ghosh
Assistant Professor
Bethune College, Kolkata, India
&
Saikat SinhaRoy
Associate Professor
Jadavpur University, Kolkata, India
Why is FDI important?
• Foreign Direct Investment (FDI) brings in a bundle of tangible and
intangible assets such as new technology, skill, marketing and
managerial know-how which are relatively scarce in the developing
countries but are indispensable for export.
• As MNEs form the major channel which brings in FDI, access to
foreign markets becomes easier which can lead to the expansion of
manufactured exports.
• Export activities of foreign firms have a prospective chance of spillovers
which might increase the productivity of the domestic firms and their
global competitiveness .
Literature
• Cohen (1975) for some export oriented firms of South
Korea, Taiwan and Singapore, Reidel(1975) &Jenkins (1979)
for Mexican industries, Kirim (1986) on Turkish
Pharmaceutical industries Roberts &Tybout(1997)for
Columbian manufacturing industries……..
• Subrahmanian &Pillai (1979), Singh(1986),Kumar(1989),
Aggarwal(2002)…….
• Aitken, Hanson &Harrison (1997),Gorg
&Greenaway(2004), Greenaway, Sousa, Wakelin(2004)…
Emerging literature relating to heterogeneity of firms
Heterogeneity of firms is explained in terms of :
 Sunk costs ( Roberts & Tybout, 1997,Schmitt & Yu,
2001)
 Productivity of firms (Melitz, 2003;Melitz &Yeaple,
2004;Melitz &Octaviano, 2005;Yeaple , 2005)
Literature on credit availability…
Chaney,2005;Helpman, Melitz & Rubenstein,
2006;Mirabelle,2008;Kapoor,Ranjan
&Raychaudhuri,2011……
This paper investigates into:
 Firm-level export performance across sectors in
India over the period 1991-2010 and identifies
the factors that determine export performance.
 In specific we explore whether FDI has a role in
determining performance.
 Whether the presence of the foreign enterprises
has any spillover effect on the export
performance of the domestic firms.
Manufacturing Industries
•
•
•
•
•
•
Chemical
Food and Beverages
Textiles
Metal and metal products
Machinery
Transport Equipments
DATABASE: PROWESS OF CMIE
PERIOD:1991-2010
Average Export intensity
Year
Chemical
Food and
beverages
Textile
Electrical
machinery
Electronics
1990s
0.09
0.24
0.22
0.06
0.07
2000s
0.18
0.28
0.29
0.07
0.01
Weighted Average Export intensity
Year
Non electrical
machinery
Ferrous
metals
Non ferrous
metals
Transport
Equipment
1990s
0.07
0.04
0.13
0.10
2000s
0.12
0.04
0.26
0.11
Difference in the average export intensity of the domestic firms
and the foreign firms tested at 5% level of significance
Industry
Mean export
Mean export
intensity of the intensity of the
domestic firms foreign firms
t value
Implication
Chemical
.13
.12
2.03
Significant
difference
Food and
Beverages
2.49
.32
1.2
No significant
difference
Textiles
.23
.16
6.9
Significant
difference
Machinery
.08
.12
5.4
Significant
difference
Metals
.41
.10
4.5
Significant
difference
Transport
Equipments
.15
.05
1.24
No Significant
difference
The theoretical structure
Following Aitken, Hanson and Harrison (1997), Journal of International
Economics,
The choice of a firm to serve the domestic market, to export or to do both
is to maximize its profit:
Max Pdqd + Pfqf- h(qd + qf)- md(qd)- mf (qf)-s , s.t. qd, qf≥0,
Subscripts d and f refer to domestic and foreign markets respectively.
Aitken’s Cost structure:
h(qd+qf)= a/2*(qd+qf)2+g (qd+qf)and,
Mi(qi)=1/2*biqi2 +ciqi ,i=f,d where a,g,b,c are scalar parameters.
Equations in the estimable forms
The export performance equation is:
(+/-)
(-/+)
(+/-)
(-/+)
(+/-)
(-/+)
(+/-)
α1(SIZE)+α2(SIZE)2+
EXPI=α0 +
α3(IMPR)+ α4(IMPR)2+ α5(KI)+ α6(KI)2+ α7(FPTR)
(-/+)
(+/-)
(-/+ )
(+/-)
(-/+)
2
2
+α8(FPTR) +α9(MKTCOST)+α10(MKTCOST) +α11(PDTIVITY)+α12(PDTIVITY)2
(+/-)
(-/+ )
(+/-)
α13(CRDT)+α14(CRDT)2+ α15(RDI)
(-/+)
(+/-)
(-/+)
2
+
α16(RDI) +α17(AGE)+ α18(AGE)2+ui +
The export spillover equation is:
(+/-)
(-/+)
(+/-)
(-/+)
(+/-)
(-/+)
(+/-)
DOMX=α0 + α1(SIZE)+α2(SIZE)2+ α3(IMPR)+ α4(IMPR)2+ α5(KI)+ α6(KI)2+ α7(FPTR)
(-/+)
(+/-)
(-/+)
(+/-)
(-/+)
2
2
+ α8(FPTR) +α9(MKTCOST)+α10(MKTCOST) +α11(PDTIVITY)+α12(PDTIVITY)2
(+/-)
(-/+ )
(+/-)
α13(CRDT)+α14(CRDT)2 α15(RDI)+
(-/+)
(+/-)
2
α16(RDI) + α17(AGE)
(-/+)
+
α18(AGE)2+ α19 (FOR) +uit
Determinants of export performance & spillovers
SIZE: Ratio of firm sales to Industry Sales.
IMPR: Ratio of imports of raw materials to Sales.
KI: Ratio of imports of capital goods to Sales.
FPTR: Ratio of technical fees and royalties paid abroad to Sales.
MKTCOST: Ratio of the sum of advertising expenditure, marketing
expenditure and distribution expenditure to Sales.
PDTIVITY: Ratio value of output to salaries and wages.
CRDT: Ratio of Total borrowing to value of output.
RDI: Ratio of R&D expenditure to Sales.
FOR: Average Export intensity of foreign firms.
Methodology
• Panel structure for the six industries are constructed.
• Panel data estimation technique has been used.
• Fixed effect and Random effect specifications are
considered.
• Hausman Specification test is taken into consideration.
Results
 SIZE & AGE turns out to be positively significant for the
high tech industries like Chemical, Metals and transport
equipments.
 IMPR is significant for most of the industries.
 KI is significant for most of the industries.
 FPTR is significant for the transport equipment industry.
 As far as the sunk costs are concerned in terms of
advertising, marketing and distribution costs MKTCOST
significantly explain exporting behavior for most of the
industries.
 PDTIVITY is important only for the Machinery industry.
 CRDT turns out to be positively significant for the
transport equipment industry.
Estimation Results Table (Export performance)
SIZE
Food an d
Be ve rage s
Te xti l e s
C h e m i cal
Tran sport
e qu i pm e n t
Mach i n e ry
Fi xe d
e ffe ct
re su l ts
Fi xe d
e ffe ct
re su l ts
Fi xe d
e ffe ct
re su l ts
Fi xe d
e ffe ct
re su l ts
Ran dom
e ffe ct
re su l ts
Me tal an d
m e tal
produ cts
Ran dom
e ffe ct
re su l ts
-14
40.15
.194.23*
-33.12
-0.0005
56.56*
(-0.50)
-0.79
-4.08
(-1.60)
(-0.03)
-3.86
0.114
.594*
.704*
0.044
.763*
-0.58
-7.43
-7.33
-0.88
-5.87
1.88
.169*
7.07*
-20.70.4**
.051*
-0.04
-4.62
-4.71
(-2.47)
-3.02
SIZE 2
AGE
0.046
-0.8
IMP R
-.00003*
2
IMP R
FP T R
55.4*
(-4.66)
-.00001*
-1.89
(-3.00)
284.09
-40.51
0.181
-107.12*
-87.56
-384.38
-0.26
(-0.20)
-0.64
(-3.06)
(-1.61)
(-0.91)
2
FP T R
123.91**
-2.06
KI
KI
2
70.44
76.87*
36.76*
18.96**
6.4
66.08
-1.42
-3.58
-4.27
-1.96
-0.96
-1.37
-51.64*
-25.7*
(-3.06)
(-3.35)
Continued…
MKT COST
MKT COST
2
RDI
315.5*
67.75*
128.43*
259.21*
50.66**
-0.03
-13.24
-3.83
-7.88
-6.22
-2.67
(-0.34)
-1637.6*
-22.04*
--354.42*
-1495.85*
-152.15*
(-2.98)
(-3.55)
(-8.60)
(-5.52)
(-2.48)
-1753.32
155.91
34.52*
142.53
-47.03
-1129.64
(-0.95)
-0.83
-1.77
-0.95
-0.98
(-2.31)
-11.5*
RDI 2
(-1.84)
P DT IVIT Y
P DT IVIT Y
0.0008
0.01
-0.14
-0.1036
.011*
0.003
-0.11
-1.38
(-0.96)
(-1.13)
-1.67
-0.81
6.31
0.0007
-0.9
-1.02
2
CRDT
0.028
-0.007
-1.23
-9.51*
-0.0002
0.007
-1.1
(-0.24)
(-0.22)
(-5.03)
(-0.19)
-0.54
0.04
0.33
2.55*
CRDT
2
R2 (overall)
F/wald
st at ist ic
Hausman
t est
Chi square
-5.23
0.1
1.60
0.003

15.30
4.28

34.40
0.002
16.71

51.66
0.16
35.03

60.61
24.13

9.91
73.93 
3.52
Export Spillovers
 FOR turns out to be positive &
significant for the Chemical industry.
In case of the other industries the
relationship is positive though not
significant.
Estimation Results (Export spillovers)
FOR
SIZE
Food &
Beverages
Trans port
equipment
Machinery Chemicals
fi x e d e ffe ct
re s u l ts
0 .0 7 5
Fi x e d
e ffe ct
re s u l ts
0 .3 9
Ra n do m
e ffe ct
re s u l ts
0 .0 0 6
Ra n do m
e ffe ct
re s u l ts
.3 6 4 * *
-0 .2 1
-0 .2 5
-0 .0 5
-2 .4 5
-3 8 .6
-1 1 .7 4
-0 .0 0 0 5
2 3 8 .8 5 *
(-0 .7 4 )
(-0 .5 1 )
(-0 .2 8 )
-3 .2 1
3 7 .3 1
-4 4 7 .6 7 * *
SIZE 2
-0 .5 8
(-2 .4 3 )
AGE
0 .0 4 2
.6 3 7 *
IMP R
-0 .2 1
-5 .1 6
1 2 .4 9
-2 .9 1
-0 .0 9
(-0 .7 1 )
8 .2 2 *
0 .0 1 9 9
-5 .0 3
-0 .3 5
IMP R2
KI
KI
2
FP T R
2
FP T R
-1 0 0 .1
0 .5 8 *
(-0 .0 9 )
-3 .3 3
-6 0 .6 6
0 .1 3 1
-.0 0 0 0 1 *
8 2 .6 3 *
(-0 .4 8 )
-0 .4 5
(-3 .0 6 )
-3 .6 3
7 4 3 .6 2
-0 .0 0 0 2
1 .4 1
-7 2 .7 8 *
-1 .1 1
(-0 .0 4 )
-0 .2 2
(-3 .3 0 )
3 8 1 .7 8
-1 7 .4
-1 1 3 .0 4 *
-5 .4
-0 .3 2
(-0 .4 3 )
(-2 .0 0 )
(-0 .0 6 )
-
0 .1 3 6
6 4 3 .9
-0 .0 2
-0 .0 7
MKT COST
MKT COST 2
RDI
292.29*
211.5*
8,.26
27.7*
-3.25
-4.48
-0.85
-2.64
-1464.20*
-1153.39*
(-2.84)
(-3.97)
1368.51
119.3
-43.093
47.64**
-0.34
-0.64
(-0.80)
-2.15
-603313.3
-15.32**
RDI 2
(-0.59)
(-2.13)
P DT IVIT Y
0.003
-0.029
0.009
-0.023
-0.46
(-0.79)
-1.36
(-1.47)
P DT IVIT Y2
CRDT
0.0002
9.06
-4.32
-1.24
0.021
0.075
-0.0002
-1.72
-0.88
(0..18)
(-0.16)
(-3.30)
-0.0006
CRDT 2
(-0.20)
R2 (overall)
0.07
0.12
0.01
0.03
F/wald
st at ist ic
Hausman
t est
Chi square
1.19  
10.44 
16.83 
82.63 
17.13
64.28
5.37
12.79
Number of
observat ions
228
610
893
1601
Conclusion
•
The average export intensity of the Indian manufacturing show a rising
trend in the post reforms period, in particular after 2000.
•
Estimation results show that with liberalization the manufacturing
industries have grown competitive with import of raw materials,
foreign capital good and technical know-how.
•
There has been huge dependence on the ability to bear sunk costs of
marketing & distribution. Productivity is not much important excepting
the machinery industry.
•
Size & Age of a firm plays an important role.
•
With an exception to the machinery industry the domestic firms are
better performers and there is evidence of export spillovers for the
Chemical industry.
THANK YOU
expi |
Coef.
Std. Err.
foreigneq | .0007985 .0002916
size |
.2109382 .0929054
impr | .0022987 .0066149
fortech | -.0105065 .0534054
fortechsq | .000169 .0013097
mktcost | .0030607 .0081623
mktcostsq | -.0000154 .0000263
rdi | .017035 .0542514
t
P>|t|
2.74
2.27
0.35
-0.20
0.13
0.37
-0.59
0.31
0.006
0.023
0.728
0.844
0.897
0.708
0.558
0.754
[95% Conf. Interval]
.0002269
.028847
-.0106662
-.1151793
-.002398
-.012937
-.0000669
-.0892957
.00137
.3930294
.0152636
.0941662
.002736
.0190584
.0000361
.1233658