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The export-diversifying impact of Japanese and US foreign direct investments in the Indian manufacturing sector

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Abstract

The paper highlights the export-diversifying impact of foreign direct investment (FDI) in a developing country. FDI may lead to export diversification in the host country if it positively affects the export intensity of industries that have a low share in world exports. Indirectly, FDI may encourage export diversification through spillover effects: that is, the presence of FDI in an industry may increase the export intensity of domestic firms. The empirical results for the Indian economy in the post-liberalisation period show that FDI from the US has led to diversification of India's exports, both directly and indirectly. However, Japanese FDI has had no significant impact on India's exports.

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Notes

  1. It has been found that resource-seeking, efficiency-seeking and export-oriented FDI would promote exports, whereas market-seeking FDI and technology-seeking FDI may not be catalysts to export growth.

  2. See Dunning (1988).

  3. For criticisms see Dunning (1981), Hill (1988, 1990).

  4. Defined as the sector consisting of industries whose average share in world exports in the period 1985–1990 is more than 1%.

  5. Defined as the sector consisting of industries whose average share in world exports in the period 1985–1990 is less than 1%.

  6. See Kumar (1994) for empirical evidence.

  7. See Kumar and Siddharthan (1997).

  8. See Dunning (1988).

  9. See Lall and Sharif (1983).

  10. Some economists have, however, criticised this distinction and have attributed this difference to the ‘vintage effect’, that is, the stage of industrialisation.

  11. Following transaction costs analysis, FDI will dominate as the mode of foreign market entry when transaction costs through the external market are high and internalisation is preferred, whereas licensing will be the preferred mode in cases where transaction costs through the market are low. In this view, FDI and licensing are alternatives or substitutes. The interaction between FDI stake and licence payments affecting exports may therefore be negative.

  12. This is contrary to Kojima's (1973) hypothesis. However, the results are consistent with those found by Encarnation (1999) for the 1970s and 1980s.

  13. A probit model has also been estimated, but the results are found to be qualitatively similar to the tobit model, and therefore are not reported. An implication of the similarity of results is that in the non-traditional sector the firm's initial decision to engage in exports does not vary much from its decision to export more.

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Authors and Affiliations

  1. Indian Council of Research in International Economic Relations (ICRIER), Jesus and Mary College, University of Delhi, New Delhi, India

    Rashmi Banga

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  1. Rashmi Banga
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Correspondence to Rashmi Banga.

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Accepted by José Manuel Campa, Departmental Editor, 18 October 2005. This paper has been with the author for two revisions.

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Banga, R. The export-diversifying impact of Japanese and US foreign direct investments in the Indian manufacturing sector. J Int Bus Stud 37, 558–568 (2006). https://doi.org/10.1057/palgrave.jibs.8400207

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  • DOI: https://doi.org/10.1057/palgrave.jibs.8400207

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