The dynamics of Indian manufacturing sector continues to be a subject of debate among policy makers and economists. The path and pace of discussion has intensified in the last couple of decades that saw many developing countries, including India, striving to integrate and find place on the global economy map. From the Indian context, it is not difficult to see why the debate has taken a serious note. The manufacturing sector’s contribution to the national GDP has remained almost stagnant over the years, with a share of 15% in 1990-91 to nearly 17% in 2009-10. However, it remains to be one of the biggest employers and a potential source to alleviate poverty in the country.
Looking at its importance, the present study has been carried out with special emphasis on the role of foreign capital, more specifically the Foreign Direct Investment (FDI) in Indian manufacturing in recent years. In a liberalized world, where the manufacturing enterprises of the major developing countries are trying to capture the domestic and international markets irrespective of the level of competition, it is quite natural to seek whether the foreign capital has played a role, and if yes, to what extent in the growth of the domestic manufacturing in recent years. Even though the role of foreign investment in the context of Indian manufacturing has attracted much academic attention ever since the early work of Chandra (1977), Subrahmanian and Pillai (1979), Gulati and Bansal (1980) and Lall and Mohammad (1983), the topic continues to be an interesting area due to the persistent changes in the policy environment over the period. Given the importance of FDI in the existing literature, the present study chooses to concentrate on a specific objective by raising the question, does FDI play a positive role in transferring technology to the Indian manufacturing firms? In other words, does the domestic firms benefit from the increased inflow of FDI in the post-1990s. To address this, the present paper explores the possibility of spillover by studying the productivity during the period 1999-2000 to 2008-09. The rest of the paper is structured as follows: it presents a brief review of related studies, followed by explanation of the underlying methodology used in the estimation of spillover, and an overview of the data source and the selection of sample firms. Subsequently, it draws the variable for empirical estimation, followed by a discussion of the results, and finally, it offers the conclusion.
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