Essays on Firm Level Responses to Trade and Foreign Direct Investment Liberalization in India

During the past three decades policy makers from a number of developing countries have undertaken outward-oriented economic reforms with the objective of stimulating global capabilities and allowing domestic firms to catch up with the technological frontier. In the case of India, one of the most important features of such economic reforms has been the promotion of exports and outward foreign direct investments (FDI). Using a rich set of econometric methodologies, we examine the forces underlying Indian firms’ global strategies in the form of exporting and investing abroad and the impact of such decisions upon their future performance. Our analysis covers the years from 1999 to 2007, a period of gradual internationalization of Indian firms in response to ongoing trade and FDI liberalization. We contrast the strategies followed by manufacturing and service firms and pay particular attention to the role of technological and financial factors in shaping firms’ globalization processes. The first chapter of this thesis starts with an analysis of the individual and complementary effects of exporting and investing abroad in stimulating the development of firms’ in-house technological capabilities. We find that outward FDI substitutes the rate of technology investments at home, a result that is consistent with the notion of technology-seeking Indian multinationals investing abroad with the purpose of acquiring foreign technology. In contrast, we uncover evidence of technology-enhancing effects from exporting amongst Indian multinationals, indicating that exporting has been an important channel through which Indian multinational expansion has encouraged greater domestic economic activity. Finally, we fail to find evidence that exporting non multinational firms always invest more in technology than non-exporting ones. Rather, the nature of this association varies according to the sector under consideration and the type of technology. In the second chapter we analyze the process of productivity growth in Indian firms. We examine the individual and complementary roles of technology investments and international activities in stimulating innovation and technological convergence, two potential sources of firms’ productivity growth. Our findings indicate that technological convergence has been an important source of productivity growth in India, with service firms converging faster to the technological frontier than manufacturing companies. We also find that exporting boosts the rate of innovation of Indian multinationals, whereas their overseas investments speed up their rate of technological convergence. In the case of non-multinational companies, exporting stimulates productivity growth by accelerating their rate of technological transfer. There are also positive complementary effects between international activities and technology investments in stimulating firms’ productivity growth either through innovation and/or through technological transfer. Finally, in the third chapter we evaluate the role of external finance for service exports. In contrast to some findings for the manufacturing sector, we find that external finance is not a significant determinant of Indian service firms’ exporting activity.