FDI, Firm Heterogeneity and Exports: An examination of evidence in India Maitri Ghosh Assistant...

FDI, Firm Heterogeneity and Exports:

An examination of evidence in India

Maitri GhoshAssistant Professor

Bethune College, Kolkata, India&

Saikat SinhaRoyAssociate Professor

Jadavpur University, Kolkata, India

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 .

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)…

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……

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.

Manufacturing Industries

• Chemical• Food and Beverages• Textiles• Metal and metal products• Machinery• Transport Equipments

DATABASE: PROWESS OF CMIEPERIOD:1991-2010

Average Export intensity

Year Chemical Food and beverages

Textile Electrical machinery

Electronics

1990s 0.09 0.24 0.22 0.06 0.07

2000s 0.18 0.28 0.29 0.07 0.01

Weighted Average Export intensity

Year Non electrical machinery

Ferrous metals

Non ferrous metals

Transport

Equipment

1990s 0.07 0.04 0.13 0.10

2000s 0.12 0.04 0.26 0.11

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

Industry Mean export intensity of the domestic firms

Mean export intensity of the foreign firms

t value Implication

Chemical .13 .12 2.03 Significant difference

Food and Beverages

2.49 .32 1.2 No significant difference

Textiles .23 .16 6.9 Significant difference

Machinery .08 .12 5.4 Significant difference

Metals .41 .10 4.5 Significant difference

Transport Equipments

.15 .05 1.24 No Significant difference

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.

Equations in the estimable formsThe 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)2 α15(RDI)+ (-/+) (+/-)α16(RDI)2+ α17(AGE) (-/+)+ α18(AGE)2+ α19 (FOR) +uit

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.

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.

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.

Estimation Results Table (Export performance)

Food and Beverages

Textiles Chemical Transport equipment

Machinery Metal and metal

productsFixed effect

results

SIZE -14 40.15 .194.23* -33.12 -0.0005 56.56*

(-0.50) -0.79 -4.08 (-1.60) (-0.03) -3.86

SIZE2

0.114 .594* .704* 0.044 .763*

0.046 -0.58 -7.43 -7.33 -0.88 -5.87

-0.8

1.88 .169* 7.07* -20.70.4** .051*

IMPR -0.04 -4.62 -4.71 (-2.47) -3.02

-.00003* 55.4* -.00001*

IMPR2 (-4.66) -1.89 (-3.00)

284.09 -40.51 0.181 -107.12* -87.56 -384.38

-0.26 (-0.20) -0.64 (-3.06) (-1.61) (-0.91)

123.91**

-2.06

70.44 76.87* 36.76* 18.96** 6.4 66.08

-1.42 -3.58 -4.27 -1.96 -0.96 -1.37

-51.64* -25.7*

(-3.06) (-3.35)

Fixed effect

results

Fixed effect

results

Fixed effect

results

Random effect

results

Random effect

results

AGE

FPTR

FPTR2

KI

KI2

Continued…

315.5* 67.75* 128.43* 259.21* 50.66** -0.03

MKTCOST -13.24 -3.83 -7.88 -6.22 -2.67 (-0.34)

-1637.6* -22.04* --354.42* -1495.85* -152.15*

MKTCOST 2 (-2.98) (-3.55) (-8.60) (-5.52) (-2.48)

-1753.32 155.91 34.52* 142.53 -47.03 -1129.64

RDI (-0.95) -0.83 -1.77 -0.95 -0.98 (-2.31)

-11.5*

RDI2 (-1.84)

0.0008 0.01 -0.14 -0.1036 .011* 0.003

-0.11 -1.38 (-0.96) (-1.13) -1.67 -0.81

6.31 0.0007

-0.9 -1.02

0.028 -0.007 -1.23 -9.51* -0.0002 0.007

-1.1 (-0.24) (-0.22) (-5.03) (-0.19) -0.54

2.55*

CRDT 2 -5.23

R2 (overall) 0.1 0.003 0.002 0.16 0.04 0.33

F/wald statistic

1.60 4.28 16.71 35.03 24.13 73.93

Hausman test

Chi square

PDTIVITY

PDTIVITY2

CRDT

9.91 3.5215.30 34.40 51.66 60.61

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.

Estimation Results (Export spillovers)

Food & Beverages

Transport equipment

Machinery Chemicals

fixed effect results

Fixed effect

results

Random effect

results

Random effect

results0.075 0.39 0.006 .364**

-0.21 -0.25 -0.05 -2.45

SIZE -38.6 -11.74 -0.0005 238.85*

(-0.74) (-0.51) (-0.28) -3.21

37.31 -447.67**

SIZE2 -0.58 (-2.43)

0.042 .637*

-0.21 -5.16

12.49 -2.91 8.22*

IMPR -0.09 (-0.71) 0.0199 -5.03

-0.35

-100.1 0.58*

IMPR2 (-0.09) -3.33

-60.66 0.131 -.00001* 82.63*

(-0.48) -0.45 (-3.06) -3.63

743.62 -0.0002 1.41 -72.78*

-1.11 (-0.04) -0.22 (-3.30)

381.78 -17.4 -113.04* -5.4

-0.32 (-0.43) (-2.00) (-0.06)

643.9 0.136

-0.02 -0.07

FOR

FPTR2

AGE

KI

KI2

FPTR

-

292.29* 211.5* 8,.26 27.7*

MKTCOST -3.25 -4.48 -0.85 -2.64

-1464.20* -1153.39*

MKTCOST 2 (-2.84) (-3.97)

1368.51 119.3 -43.093 47.64**

RDI -0.34 -0.64 (-0.80) -2.15

-603313.3 -15.32**

RDI2 (-0.59) (-2.13)

0.003 -0.029 0.009 -0.023

-0.46 (-0.79) -1.36 (-1.47)

0.0002 9.06

-4.32 -1.24

0.021 0.075 -0.0002 -1.72

-0.88 (0..18) (-0.16) (-3.30)

-0.0006

CRDT 2 (-0.20)

R2 (overall) 0.07 0.12 0.01 0.03

F/wald statistic

1.19 10.44 16.83 82.63

Hausman test

Chi square

Number of observations

228 610 893 1601

PDTIVITY

PDTIVITY2

CRDT

17.13 64.28 5.37 12.79

• 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.

Conclusion

THANK YOU

FDI, Firm Heterogeneity and Exports: An examination of evidence in India Maitri Ghosh Assistant...

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