FDI spillovers and local productivity growth: evidence from Indian pharmaceutical industry

The study tests the FDI spillover hypothesis in the Indian Pharmaceutical industry using an unbalanced panel data for a sample of firms over the period 1989-90 to 2000-01. The study estimates firm-specific productive efficiency growth for domestic firms from frontier production function and relates the same to a set of firm-specific attributes along with the variables of foreign presence. The study found that the presence of foreign firms per se may not be important for productivity growth of domestic firms unless it is complemented by the latter’s R&D activity or size. Therefore, the study concludes that policy efforts to encourage R&D and some concentration of size of the domestic firms in the industry may be more desirable than passively liberalizing the FDI policy from the point of view of increasing productive efficiency of local enterprises.