Japanese and United Kingdom Foreign Direct Investments in Indian Manufacturing Sector – A Firm Level Comparative Analysis of Differential Impact on Productivity Growth

Abstract

This paper brings out the differential effect of the impact of foreign direct investment (FDI) from different source countries on the Total Factor Productivity Growth in a developing country. The study explores the effects of Japanese and United Kingdom foreign direct investments (FDI) on total factor productivity growth (TFPG) within the firms in the Automobile, Electrical, and Chemical industries during the post-liberalization era in the Indian economy. It involves sector-specific, firm-level comparisons of TFPG, efficiency changes, and technological advancements among Japanese-affiliated, U.K.-affiliated, and domestic firms during the specific timeframe chosen for the research work. To estimate TFPG, a modified Cobb-Douglas Production frontier is utilized. The Malmquist indices are employed to disaggregate TFPG into productivity changes due to shifts in efficiency and technology. These elements are compared across the three groups of firms within each industry during the specific time frame from 2014-15 to 2019-2020.

The findings from this empirical study conducted on the Indian manufacturing sector reveal that efficiency growth predominantly drives TFPG in Japanese firms, whereas technological advancement is the primary driver in the firms affiliated to United Kingdom. Significantly, the study notes that during the post-liberalization period, domestic firms in two of the sectors chosen for this research study have achieved both efficiency growth as well as technological progress, thus indicating a definite shift to higher productivity levels. The empirical findings of this study reiterate the significance of studying the differential effect of FDI from different source countries and the varying effects they have within the host economy.