FDI and spillover effects in the Indian pharmaceutical industry

Abstract: Foreign Direct Investment (FDI) is widely considered to be beneficial for the host economy since it can result in positive externalities (spillover effects) through various transmission channels, for instance, transfer of technology, increased competition and imitation effects. This study analyses intra- industry spillover effects of FDI in the pharmaceutical industry in India. A literature review, interviews and an econometric analysis are carried out in order to examine FDI’s impact on the industry. The Indian pharmaceutical industry has developed through a range of governmental incentives and, foreign firms that have invested in the industry have additionally contributed to the growth. The results are mixed. Spillover effects are visible in many of the spillover channels from FDI and the regression results show that firms with foreign ownership experience higher productivity levels. However, the correlation between FDI and productivity in domestic firms is insignificant, due to various reasons depending on whether the benefits from FDI are materialized, local firms’ absorptive capability and factors such as the market structure, competitiveness, trade and technological policies. It is in the interest of the state to provide public policies and a sound economic environment to encourage benefit from FDI. Therefore public policies are also taken into consideration in this study.