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FDI, Firm Heterogeneity and Exports: An examination of evidence in India Maitri Ghosh Assistant Professor Bethune College, Kolkata, India & Saikat SinhaRoy.

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Presentation on theme: "FDI, Firm Heterogeneity and Exports: An examination of evidence in India Maitri Ghosh Assistant Professor Bethune College, Kolkata, India & Saikat SinhaRoy."— Presentation transcript:

1 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

2 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.

3 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)…

4 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 ……

5 This paper investigates into: Firm-level export performance across sectors in India over the period 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.

6 Manufacturing Industries Chemical Food and Beverages Textiles Metal and metal products Machinery Transport Equipments DATABASE: PROWESS OF CMIE PERIOD:

7 Average Export intensity YearChemicalFood and beverages TextileElectrical machinery Electronics 1990s s

8 Weighted Average Export intensity YearNon electrical machinery Ferrous metals Non ferrous metals Transport Equipment 1990s s

9 Difference in the average export intensity of the domestic firms and the foreign firms tested at 5% level of significance IndustryMean export intensity of the domestic firms Mean export intensity of the foreign firms t valueImplication Chemical Significant difference Food and Beverages No significant difference Textiles Significant difference Machinery Significant difference Metals Significant difference Transport Equipments No Significant difference

10 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 P d q d + P f q f - h(q d + q f )- m d (q d )- m f (q f )-s, s.t. q d, q f 0, Subscripts d and f refer to domestic and foreign markets respectively. Aitkens Cost structure: h(q d +q f )= a/2*(q d +q f ) 2 +g (q d +q f )and, M i (q i )=1/2*b i q i 2 +c i q i,i=f,d where a,g,b,c are scalar parameters.

11 Equations in the estimable forms The export performance equation is: (+/-) (-/+) (+/-) (-/+) (+/-) (-/+) (+/-) EXPI=α 0 + α 1 (SIZE)+α 2 (SIZE) 2 + α 3 (IMPR)+ α 4 (IMPR) 2 + α 5 (KI)+ α 6 (KI) 2 + α 7 (FPTR) (-/+) (+/-) (-/+ ) (+/-) (-/+) +α 8 (FPTR) 2 +α 9 (MKTCOST)+α 10 (MKTCOST) 2 +α 11 (PDTIVITY)+α 12 (PDTIVITY) 2 (+/-) (-/+ ) (+/-) α 13 (CRDT)+α 14 (CRDT) 2 + α 15 (RDI) (-/+) (+/-) (-/+) + α 16 (RDI) 2 +α 17 (AGE) + α 18 (AGE) 2 +u i + The export spillover equation is : (+/-) (-/+) (+/-) (-/+) (+/-) (-/+) (+/-) DOMX=α 0 + α 1 (SIZE)+α 2 (SIZE) 2 + α 3 (IMPR)+ α 4 (IMPR) 2 + α 5 (KI)+ α 6 (KI) 2 + α 7 (FPTR) (-/+) (+/-) (-/+) (+/-) (-/+) + α 8 (FPTR) 2 +α 9 (MKTCOST)+α 10 (MKTCOST) 2 +α 11 (PDTIVITY)+α 12 (PDTIVITY) 2 (+/-) (-/+ ) (+/-) α 13 (CRDT)+α 14 (CRDT) 2 α 15 (RDI)+ (-/+) (+/-) α 16 (RDI) 2 + α 17 (AGE) (-/+) + α 18 (AGE) 2 + α 19 (FOR) +u it

12 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.

13 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.

14 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.

15 Estimation Results Table (Export performance)

16 Continued…

17 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.

18 Estimation Results (Export spillovers)

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20 The average export intensity of the Indian manufacturing show a rising trend in the post reforms period, in particular after 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. Conclusion

21 THANK YOU

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