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 FDIIt 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

FDI presence in introduced in the equation in two ways: first differences

lagged one or two periods

jTidd

ijTd

Tj

jTlTltijTd

ijTd

ITAgeAgeZBacward

BackwardFDIpartFDIpartInputY

21,

1lnln

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 & know-how

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