Multinationals, local firms, and economic reforms in Indian industry
This thesis seeks to understand multinational activity in Indian industry after the reforms of 1991. Chapter 2 models two effects of inward FDI on local industry - linkage and competition effects. We develop a two-sector model with vertical product differentiation in the downstream sector and a monopolistically competitive upstream sector. We show that a domestic content requirement increases both linkage and competition effects, and can raise domestic welfare through growth of upstream industry, and increased consumer welfare. The stronger are linkage effects, and lower the income level, the greater are benefits from a DCR. Chapter 3 presents descriptive statistics and stylized facts about multinationals in India. We consider sectoral destination, characteristics, and performance of MNCs. We find MNC investment is horizontal and that they are more profitable than domestic firms. A model of distribution dynamics is used to investigate persistence in profitability. Differences in performance are driven by persistence of profits of highly profitable MNCs. In Chapter 4 we test for the effects of FDI reforms on firm performance. By constructing treatment and control groups and using pre and post reform data, we isolate the impact of reforms. We find that local firms' profitability has been reduced by the entry of new MNCs. However, pre-existing MNC profits have not been significantly affected by reforms. We find some evidence that MNCs are more efficient than local firms. In Chapter 5, we analyze export behaviour of Indian firms. Decomposing exports shows that post-reform export growth has been driven by surviving firms. We model the decision of the firm to export, and find that there are substantial sunk costs to exporting. Firm characteristics - size, profitability and multinationality - are important determinants of exporting. We find evidence for spillovers from general exporting activity but not from MNC presence in the industry on exporting.