The Impact of R&D and Foreign Direct Investment on Firm Growth in Emerging-Developing Countries: Evidence from Indian Manufacturing Industries

Adamos Adamou () and Subash S ()
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Adamos Adamou: Madras School of Economics
Subash S: Madras School of Economics
Authors registered in the RePEc Author Service: Subash Sasidharan

Working Papers from Madras School of Economics,Chennai,India

Abstract: This paper examines the impact of R&D and FDI on firm growth for a panel data of Indian manufacturing firms. We argue that besides age and size, FDI and R&D are essential determinants of firm growth. We use GMM estimation for fixed effects panel data models to control for endogenity of R&D and FDI. We find that an increase in current R&D induces higher growth across all industries; where as the effect of increase in FDI is mixed - higher growth in some industries and lower growth in some others. Furthermore, Gibrat’s law is not only rejected by our main model but it is also rejected by a unit root test for unbalanced panel datasets. This provides strong evidence in favor of our model. Finally, firm growth is negatively associated with its size and it is convex with respect to its age. The fact that firm growth is not diminishing convex – but just convex – with respect to age, contradicts the Jovanovic’s argument that younger firms tend to grow faster than their older counterparts. With respect to firm growth, the absence of learning-effects appears to be the main difference between emerging-developing and developed countries.

Keywords: R&D; foreign direct investment; panel data; firm growth (search for similar items in EconPapers)
Pages: 24 pages
Date: 2008-09
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Working Paper: The Impact of R&D and Foreign Direct Investment on Firm Growth in Emerging-Developing Countries: Evidence from Indian Manufacturing Industries (2008)
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