Foreign Direct Investment and R&D: Substitutes or Complements—A Case of Indian Manufacturing after 1991 Reforms

SummaryThe entry of foreign firms in India since the reforms forces domestic firms to undertake R&D activities or import technology so as to compete with them. This study examines the relationship between FDI and R&D of the domestic firms in the post-liberalization regime. The study uses unbalanced panel data for 1,843 Indian manufacturing firms operating during the period 1994–2005 and corrects for the self-selection problem by using a Heckman-two step procedure. The analysis involving full sample does not give a clear picture of the impact of FDI on the innovation strategies of domestic firms. Interesting results emerge, when analysis is carried out according to different sub-samples—based on foreign-ownership and technology intensity of the industry. FDI and R&D are found to be complements when sample is divided on the bases of equity ownership. FDI inflow induces foreign-owned firms in high tech industries and firms in minority ownership to invest in R&D.