FDI, Firm Heterogeneity and Exports: An examination of evidence in India

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 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.

6. Chemical Food and Beverages Textiles Metal and metal products Machinery Transport Equipments DATABASE: PROWESS OF CMIE PERIOD:1991-2010 Manufacturing Industries

7. Average Export intensity

8. Weighted Average Export intensity

9. Difference in the average export intensity of the domestic firms and the foreign firms tested at 5% level of significance

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 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.

11. Equations in the estimable forms The export performance equation is: (+/-) (-/+) (+/-) (-/+) (+/-) (-/+) (+/-) EXPI=α0 + α1(SIZE)+α2(SIZE)2+ α3(IMPR)+ α4(IMPR)2+ α5(KI)+ α6(KI)2+ α7(FPTR) (-/+) (+/-) (-/+ ) (+/-) (-/+) +α8(FPTR)2+α9(MKTCOST)+α10(MKTCOST)2+α11(PDTIVITY)+α12(PDTIVITY)2 (+/-) (-/+ ) (+/-) α13(CRDT)+α14(CRDT)2+ α15(RDI) (-/+) (+/-) (-/+) + α16(RDI)2+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) (-/+) (+/-) (-/+) (+/-) (-/+) + α8(FPTR)2 +α9(MKTCOST)+α10(MKTCOST)2+α11(PDTIVITY)+α12(PDTIVITY)2 (+/-) (-/+ ) (+/-) α13(CRDT)+α14(CRDT)2α15(RDI)+ (-/+) (+/-) α16(RDI)2+ α17(AGE) (-/+) + α18(AGE)2+α19 (FOR) +uit

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)

20. 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.

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