Establishment Productivity Convergence and the Effect of Foreign Ownership at the Frontier

Abstract

I estimate establishment level total factor productivity (TFP) convergence using panel data from India’s manufacturing sector from 2001-2015. I examine the presence of foreign owned establishments within each industry’s productivity frontier, and allow for the speed of productivity convergence to differ based on the ownership composition of the frontier. While I find statistically and quantitatively significant overall conditional convergence to the frontier, I show that convergence to the foreign owned component of the frontier is markedly slower. This result suggests differences in the nature of technology transfer from highly productive domestic and foreign firms. I argue my general approach reconciles the previously disconnected findings of negligible spillovers from foreign direct investment in developing countries, despite evidence of positive productivity convergence and the substantial presence of foreign firms in the productivity frontier.

Keywords: Total factor productivity, convergence, foreign direct investment, knowledge spillovers

JEL Classification: F23, O33, O47