Export-Orientation of Foreign Manufacturing Affiliates in India: Factors, Tendencies and Implications
Social Science Research Network
This paper addresses an important development issue in the literature of international production, namely, what motivates market-seeking foreign direct investment (FDI) to undertake export activities. It is well recognized in the concerned literature that export-oriented FDI is more beneficial for the host country than purely domestic market-seeking FDI. However, the existing literature has not examined those factors that could motivate existing market-seeking FDI into export activities. The
... activities. The present study addresses this issue and identifies factors encouraging market-seeking FDI to take up export activities. The empirical analysis of exportorientation of foreign firms in Indian manufacturing across 17 Indian industries during 1991-2005 has brought out several policy issues important for increasing export-orientation of foreign firms in a developing country like India. Page | 101 played a relatively minor role in export promotion. Moreover, the exportenhancing role of FDI also seems to vary according to the shift in the policy regime. In fact, most recent studies on Indian manufacturing relating to the reform period, for instance, Aggarwal (2002) and Kumar and Pradhan (2007) indicate that foreign firms have higher export-orientation than local firms. What factors explain the above cross-country divergence in the export performance of foreign affiliates? Recent literature increasingly emphasizes the ability of countries to attract export-oriented FDI as opposed to market-seeking or local market-oriented FDI to explain country-specific differentials in foreign affiliates' export orientation. For example, countries such as China, Malaysia and Indonesia are argued to have been successful in attracting export-oriented FDI projects. Following this, aspirant developing countries are urged to address factors that would improve their attractiveness to export-oriented FDI. Studies dealing with the locational determinants of export-oriented FDI such as Woodward and Rolfe (1993) and 1998) have underscored the role of structural factors like per capita income, availability of low cost labour, size of free trade/ export processing zones, quality of available infrastructure, participation in regional trading blocks, liberal trade regime, and tax benefits in attracting export-oriented FDI. Apart from the emphasis on improving these locational advantages, developing countries are also urged to adopt policies that improve access to imported inputs through trade facilitation, that rationalize the use of fiscal and financial incentives according to efficacy and that conform to the international regulatory framework, that set up export processing zones, and that are targeted at and coherent in dealing with export-oriented FDI (UNCTAD 2002).