The Role of Foreign Firms in India Over the Past Half Century: Retrospect and Prospect

Abstract

This article evaluates whether the changing presence of foreign firms in India's corporate sector has had an impact on the long-run economic performance of India's industrial sector. The patterns of corporate demography, including the role of foreign firms, in India over the last five decades, from the 1950s to the 2000s are traced and then related to a measure of economic performance calculated as productive efficiency indices for all of Indian industry for the period from 1957-58 to 2001-02. The results show a strong relationship between the growing presence of foreign firms in India and the productive efficiency of Indian industry. The notion that foreign firms' capabilities can spillover to other sectors of industry finds support, and an increase in foreign firms' presence is also associated with an enhancement of the ability of Indian industry to utilize its managerial human capital effectively. In the period after reforms commenced in 1991, the number of foreign firms operating in India has increased substantially. Thus, foreign firms are interested in becoming an increasing presence in the Indian economy, with positive performance consequences expected from such increased participation. So far, basic property rights changes have had significant effects on providing incentives for foreign firms to operate in India and the automatic availability of such property rights has been a major factor that affects the motivation of foreign firms to set up operations in India. Yet, the government gave veto rights to the Indian private sector on certain aspects of the entry of foreign firms into India by promulgating Press Note 18 in late 1998, repealed in early 2005, and it is difficult to speculate on either the precise numbers of foreign companies that were scared off by this note or the loss of performance accompanying the absence of foreign firms from Indian industry.

Keywords: corporate demography, economic reforms, foreign direct investment, Indian industry, productive efficiency, property rights, spillovers

JEL Classification: F23, L11, L32, M2