Does Higher Productivity and Efficiency Lead to Spillover?: Evidence from Indian Manufacturing

This paper empirically analyzes spillover effects from foreign direct investment using the firm level panel data of Indian manufacturing during 2000–01 and 2009–10. It first estimates the productivity and efficiency of the domestic and foreign firms separately before examining the spillover effects by using PROWESS dataset. The use of the Cobb-Douglas production function for productivity and stochastic frontier approach for efficiency reveals higher productivity and efficiency of the foreign firms over their domestic counterparts. Similarly, the findings show a significant impact of FDI on output growth. This indicates that any increase in foreign equity at the firm and sector level directly affects productivity. We attempt to find the possible reason for positive spillover effects by analyzing the detail of the present trends and the dataset.