active mnc subsidiaries and spillover effects: the case of indian manufacturing sector
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Active MNC Subsidiaries and Spillover Effects: The case of Indian Manufacturing Sector. Anabel Marin ( SPRU,UK) and Subash Sasidharan (Indian Institute of Technology Bombay ). Introduction. Technological spillover from FDI - PowerPoint PPT PresentationTRANSCRIPT
Active MNC Subsidiaries and Spillover Effects: The case of Indian Manufacturing Sector
Anabel Marin
(SPRU,UK)
and
Subash Sasidharan
(Indian Institute of Technology Bombay)
Introduction
Technological spillover from FDIIt questions some of the well established
assumptions about the supply- side spillovers derives exclusively from the
technological assets created by the parent companies
Conventional View of FDI Spillovers
The combination of:
centrally accumulated technological assets,
knowledge that is easily transferable between units of the MNC,
and tightly integrated organisational behaviour
provides the basis for a ‘pipeline’ that delivers spillovers of superior technology from the MNC parents to domestic firms, without the active intervention of local MNC subsidiaries.
Such spillovers are presumed to follow on almost inevitably from the centrally driven technological advantage of the corporation.
We refer to this model as a ‘centrally-driven perspective’ of the process of spillover generation.
Common explanations for the lack of spillovers: limited capabilities of locally owned firms, or strategy of the MNC (or its industry)
Unfortunately … many studies have not found effects associated with the
limited absorptive capability of firms to be significant
whilst the second type of argument has not, for the most part, been empirically evaluated.
A different model… spillover effects are likely to occur as a result of active
accumulation and creation of knowledge by subsidiaries (Marin & Bell’s argument)
Active subsidiaries: importance for Spillovers
Subsidiaries’ technological activities may
contribute to their absorptive capacity with respect to the knowledge transferred from the parent
influence the subsidiaries’ capacity to attract better technological resources from the rest of the MNC
become the source of more original innovation
What has been said about the subsidiaries’ role?
Knowledge which can leak out to local firms Gupta and Govindarajan (2001) - Importance of
localised technological activities for knowledge acquisition:The notion that MNCs exist primarily because of their
superior ability to engage in internal knowledge transfer does not in any way imply that such knowledge transfer actually takes place effectively and efficiently in a routine bases” (p.474)
Szulansky (1996) - Success of the technology transfer:function of subsidiaries´ pre-existent stock of knowledge
and their retentive capacity depend on their own technological activities in the host country
Contd …
Brikinshaw and Hood (1998)
subsidiaries can develop a stock of distinctive assets on which the rest of the corporation starts to be dependent
the development of unique resources in subsidiaries may not always depend exclusively on headquarter decisions
Testing these hypothesis
‘Pipeline Model’ ‘Absorptive Capability’: classifying domestic
firms in two groups: (a) with high absorptive capacity and (b) with low absorptive capacity
‘Industry Model’: grouping domestic firms according to the technological intensity of the industry based on OECD classification
‘Subsidiary –Driven’ model: distinguishing domestic firms according to subsidiaries’ technological activities
Methodology
The subsidiary-driven model (Marin & Bell):
This paper extends and deepens the analysis: INDIA
FDI in India
Vigorous FDI inflows in the 1990s
Opened up the economy to FDI …..
Data Source
PROWESS (CMIE) data base for India,1994-2002
Input-Output tables: Central Statistical Organisation, India (1998-1999)
Innovative Activities and Absorptive Capacity
disembodied knowledge Intensity of expenditures in R&D Intensity of licences and royalties
embodied Knowledge Capital Goods Import Intensity
skills intensity value added per unit of wage bill
Firm’s technological behaviour
Foreign ownership: 12 % of firms
industrial firms are, in general, more technologically active in terms embodied and disembodied technology investments
Estimation of Spillover Effects
Basic Model
FDI presence in introduced in the equation in two ways: first differences
lagged one or two periods
jTidd
ijTd
Tj
jTlTltijTd
ijTd
ITAgeAgeZBacward
BackwardFDIpartFDIpartInputY
21,
1lnln
Vertical Spillover
Results
Pipeline Model: Horizontal spillover effects:
negative & significant (competition effects) Vertical spillover effects:
no externalities are found
Absorptive Capability’ model: there is not clear influence (in some cases running
in the opposite direction)
Results contd…
Industry Model: Medium-tech industries (where the MNCs
are concentrated): negative relationship between FDI and productivity growth
These results question the importance of this model, which predicts that spillover will arise only in the more technologically intensive industries
Results contd…
Subsidiary-centred model: fourteen positive and significant results four negative and significant results both running in the expected direction!
Results contd…
Subsidiary-centred model: the effects are significant for competitors domestic firms in industries where subsidiaries spent
little on R&D do not experience productivity growth or experienced ‘negative spillovers’
negative effects when subsidiaries are passive with respect to capital goods imports and royalties & know-how
An interesting result:
we have used the top quartile or top ten percent.
This difference indicates that spillovers in India are only occurring in a relative small number of sub-industries (enclaves) where subsidiaries are very active
Conclusions
Spillovers in India are far more localised than in Argentina
FDI-related spillovers appear to be country specific: industrial history and structure and policy frameworks
Subsidiaries engaged in knowledge-generating activities are the only ones that have the potential to produce significant spillovers
Spending resources to attract FDI in general may not be efficient. What may be important is to identify the particular circumstances in which these positive externalities may emerge, and target those scarce resources accordingly