Active MNC Subsidiaries and Spillover Effects:
The case of Indian Manufacturing Sector
Anabel Marin
(SPRU,UK)
and
Subash Sasidharan
(Indian Institute of Technology Bombay)
Introduction
Technological spillover from FDI
It questions some of the well established
assumptions about the supply- side
spillovers derives exclusively from the
technological assets created by the parent
companies
Conventional View of FDI Spillovers
 The combination of:
centrally accumulated technological assets,
 knowledge that is easily transferable between units of the MNC,
and tightly integrated organisational behaviour
 provides the basis for a ‘pipeline’ that delivers spillovers of
superior technology from the MNC parents to domestic firms,
without the active intervention of local MNC subsidiaries.
 Such spillovers are presumed to follow on almost inevitably
from the centrally driven technological advantage of the
corporation.
 We refer to this model as a ‘centrally-driven perspective’ of
the process of spillover generation.
Common explanations for the lack of spillovers:
 limited capabilities of locally owned firms, or
 strategy of the MNC (or its industry)
Unfortunately …
many studies have not found effects associated with the
limited absorptive capability of firms to be significant
whilst the second type of argument has not, for the most part,
been empirically evaluated.
A different model…
spillover effects are likely to occur as a result of active
accumulation and creation of knowledge by subsidiaries
(Marin & Bell’s argument)
Active subsidiaries: importance for Spillovers
Subsidiaries’ technological activities may
contribute to their absorptive capacity with
respect to the knowledge transferred from the
parent
influence the subsidiaries’ capacity to attract
better technological resources from the rest of the
MNC
become the source of more original innovation
What has been said about the subsidiaries’ role?
Knowledge which can leak out to local firms
Gupta and Govindarajan (2001) - Importance of
localised technological activities for knowledge
acquisition:
The notion that MNCs exist primarily because of their
superior ability to engage in internal knowledge transfer
does not in any way imply that such knowledge transfer
actually takes place effectively and efficiently in a routine
bases” (p.474)
Szulansky (1996) - Success of the technology transfer:
function of subsidiaries´ pre-existent stock of knowledge
and their retentive capacity depend on their own
technological activities in the host country
Contd …
Brikinshaw and Hood (1998)
subsidiaries can develop a stock of distinctive
assets on which the rest of the corporation starts to
be dependent
the development of unique resources in
subsidiaries may not always depend exclusively on
headquarter decisions
Testing these hypothesis
 ‘Pipeline Model’
 ‘Absorptive Capability’: classifying domestic
firms in two groups: (a) with high absorptive
capacity and (b) with low absorptive capacity
 ‘Industry Model’: grouping domestic firms
according to the technological intensity of the
industry based on OECD classification
 ‘Subsidiary –Driven’ model: distinguishing
domestic firms according to subsidiaries’
technological activities
Methodology
The subsidiary-driven model (Marin &
Bell):
This paper extends and deepens the
analysis: INDIA
FDI in India
 Vigorous FDI inflows in the 1990s
 Opened up the economy to FDI …..
Data Source
 PROWESS (CMIE) data base for India,1994-2002
 Input-Output tables:
Central Statistical Organisation, India (1998-1999)
Innovative Activities and Absorptive Capacity
 disembodied knowledge
 Intensity of expenditures in R&D
 Intensity of licences and royalties
 embodied Knowledge
 Capital Goods Import Intensity
 skills intensity
value added per unit of wage bill
Firm’s technological behaviour
Foreign ownership: 12 % of firms
industrial firms are, in general, more
technologically active in terms
embodied and disembodied technology
investments
Estimation of Spillover Effects
Basic Model
 ln Y d ijT   ln Input d ijT  FDIpart lt  FDIpart lT 1  Backward jT 
Bacward j ,T 1  Z d ijT  Age  Age2  T d  I d   i jT
FDI presence in introduced in the equation in two ways:
 first differences
 lagged one or two periods
Vertical Spillover
Results
Pipeline Model:
 Horizontal spillover effects:
 negative & significant (competition effects)
 Vertical spillover effects:
 no externalities are found
Absorptive Capability’ model:
 there is not clear influence (in some cases running
in the opposite direction)
Results contd…
Industry Model:
 Medium-tech industries (where the MNCs
are concentrated): negative relationship
between FDI and productivity growth
 These results question the importance of this
model, which predicts that spillover will
arise only in the more technologically
intensive industries
Results contd…
Subsidiary-centred model:
 fourteen positive and significant results
 four negative and significant results
 both running in the expected direction!
Results contd…
Subsidiary-centred model:
 the effects are significant for competitors
 domestic firms in industries where subsidiaries spent
little on R&D do not experience productivity growth or
experienced ‘negative spillovers’
 negative effects when subsidiaries are passive with
respect to capital goods imports and royalties & knowhow
An interesting result:

we have used the top quartile or top ten
percent.
This difference indicates that spillovers in
India are only occurring in a relative small
number of sub-industries (enclaves) where
subsidiaries are very active
Conclusions
 Spillovers in India are far more localised than in
Argentina
 FDI-related spillovers appear to be country
specific: industrial history and structure and policy
frameworks
 Subsidiaries engaged in knowledge-generating
activities are the only ones that have the potential
to produce significant spillovers
 Spending resources to attract FDI in general may
not be efficient. What may be important is to
identify the particular circumstances in which these
positive externalities may emerge, and target those
scarce resources accordingly