Foreign Capital, Spillovers and Export Performance in Emerging Economies: Evidence from Indian IT Firms

• Date: 01 November 2014
• DOI: http://doi.org/10.1111/rode.12111
• Published date: 01 November 2014

Foreign Capital, Spillovers and Export Performance

in Emerging Economies: Evidence from Indian

IT Firms

David M. Kemme, Alex Nikolsko-Rzhevskyy, and Deepraj Mukherjee*

Abstract

The role of foreign capital inflow, foreign direct investment (FDI) and foreign portfolio investment (FPI),

on export behavior of both recipients and non-recipient competing firms in the same sector often guides

economic development policy. By using panel data of Indian IT firms over 2000–2006, we show that FDI

reduces the sunk costs of entering foreign markets and therefore positively effects both the decision to

export and the export propensity of recipient firms. Foreign portfolio investment has no effect on the deci-

sion to export, but it does marginally increase the volume of exports. Further, these positive FDI and FPI

recipient effects do not spill-over to non-recipients.

1. Introduction

Since the liberalization of the 1990s, foreign direct investment (FDI) in India has

increased from US$237 million in 1990 to US$23.7 billion in 20101and exports rose

from US$33,470 million in 1997 to US$225.4 billion—in 2010. Indian policy makers

intended to pursue a program of liberalization and attraction of foreign capital as a

means of improving overall economic growth. Much of the enthusiasm for such poli-

cies stems from the expectation that foreign capital investment in a particular sector

of the economy transforms not only the recipient firms, but also spills over, affecting

the behavior of other firms in the sector. However, given the high expectations, is it

really likely that foreign investment can generate these anticipated levels of growth

and, to be fully successful, increase exports of non-FDI recipient firms as well? In this

paper we focus on the direct and indirect effects of foreign capital inflow, in

particular—FDI. Specifically, we ask whether there are links between FDI and export

behavior and whether there are spillover effects, i.e. is there a link, direct or indirect,

between FDI and the export activities of other non-recipient firms in the same indus-

try? Further, we note that foreign capital inflows in general, both FDI and foreign

portfolio investment (FPI), may generate similar effects. Therefore, we also consider

the potential effects of FDI and FPI flows on export behavior separately.2

International policy makers have long advocated that developing countries should

attract “the right FDI” to “tap into the new international production systems of trans-

national corporations (TNCs).”3“Export-platform” FDI exhibits two distinctive char-

acteristics. First, low transportation costs, e.g. in certain industries such as information

technology and pharmaceuticals, allows fragmentation in production and differences

* Nikolsko-Rzhevskyy: Lehigh University, Bethlehem, PA 18015, USA. Tel: +1-832-409-2187; Fax: +1-610-

758-4677; E-mail: alex.rzhevskyy@gmail.com. Kemme: University of Memphis, Memphis, TN 38111, USA.

Mukherjee: Kent State University, OH 44242, USA. The authors thank the participants of Midwest Eco-

nomic Association Conference, March 2009 and the Euro Conference 2011: Crises and Recovery in Emerg-

ing Markets, June 27-30, 2011, Izmir, Turkey for valuable comments and suggestions.

Review of Development Economics, 18(4), 681–692, 2014

DOI:10.1111/rode.12111

The copy right line for this article was changed on December 2016 after original online publication.

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

©2016 The Authors. Review of Development Economics Published by John Wiley & Sons Ltd.

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