The Impact of FDI on Domestic Competition and Industrial Growth in Emerging Economies: The Case of India
The increasing inflow of Foreign Direct Investment (FDI) over the years to emerging economies is seen with great optimism by governments and policy makers since it is expected to uplift the economic position of the host countries through positive spill-overs. Various studies have examined the impact of FDI on the domestic firms, economic growth and productivity of the host economy, highlighting the positive externalities that make this investment a worthwhile option to explore. However, the fact that this investment may sometimes negatively affect the output of the host economy or the behaviour of domestic firms is not thoroughly explored, especially with respect to developing economies where FDI may cause domestic firms to exit or prevent the establishment of small and medium enterprises. Furthermore, most of the previous studies have focused on either the domestic industry or the industrial output or exports without simultaneously analysing the effect on a combination of such factors. This study therefore incorporates the effect of FDI on domestic industry in terms of the presence, entry and exit of domestic firms and the growth in output and export orientation of the host economy. The relationship between FDI with the different variables that contribute to the domestic competition and industrial expansion and growth has been analyzed. The results of the analysis show that while FDI has a strong association with the output and export growth of the host economy; it does not appear to add value. Simultaneously, it causes a large number of local firms to exit the industry. Nonetheless, it appears to stimulate the local industrial growth by allowing new firms to enter and enhancing the market capitalization of listed firms. Furthermore, the number of micro, small and medium enterprises (MSMEs) and their employment rate also shows an upward trend with FDI. The growth in exports, especially high technology exports stresses on the presence of technology spill-overs to the host economy.
This study considers the impact of FDI on the host economy by taking into account various factors, each of which can be a priority for policy makers and an incentive to attract foreign investment. However, it is essential to understand how FDI affects the industry on the whole by studying the impact on each of them in isolation. The research aims to inter-relate the literature available on knowledge and technology spill-overs and competition to understand how local firms derive benefits from FDI in their country. The objective is to understand if increased inflow of FDI prevents the entry and growth of domestic firms in emerging economies. Simultaneously, it strives to determine if the entry of a foreign enterprise leads to an exit of local firms from the industry. Additionally, it is also aimed at understanding how FDI can shape the industrial output and export competitiveness of the host country.
Research Questions
- How does FDI affect the entry and exit of domestic firms in the host economy?
- Does FDI induce industrial expansion in the host economy?
- Do local industries in emerging economies experience an increase in the output and export growth as a result of FDI?
