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Identifying the impact of geographical proximity on spillover effect of FDI: The evidence from Indian local firms’ performance gains

Young Chul Song and Sung Hyun Son

The North American Journal of Economics and Finance, 2020, vol. 52, issue C

Abstract: This paper investigates the role of geographical proximity on FDI spillovers from foreign to Indian local firms. We use data set of the manufacturing firms between 1988 and 2018 in India, estimating the productivity based on Cobb–Douglas production function. For measuring geographical proximity, the coordinates of each firm, represented to as ‘latitude and longitude’, provided by Google maps geocoding API is used. To conduct spatial analysis, we adopted the revised ‘SINM’ (Spatial Industrial Network Model)’ with GMM estimator, and used firm based point spatial unit. The analysis, in particular, reveals that within 30 km–70 km distance the presence of FDI creates significant positive backward and negative horizontal spillovers, but gradually decaying as threshold increases. Meanwhile, the negative horizontal spillovers to Indian local firms located within industrial clusters turned to positive, and the positive backward spillovers more magnifies compared to non-clustered firms. Based on these findings, we suggested the several policy implications regarding the development of industrial cluster, FDI promotion policy, and location decision for foreign investors.

Keywords: FDI; Spatial Spillovers; Technology Diffusion; Geographic Proximity (search for similar items in EconPapers)
JEL-codes: D24 F23 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:52:y:2020:i:c:s1062940818304832

DOI: 10.1016/j.najef.2019.101138

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