Quality Responses to Foreign Direct Investment Liberalization

Vidhya Soundararajan, Kamalesh Pahurkar and Krishnan Narayanan
Additional contact information
Kamalesh Pahurkar: Indian Institute of Technology (IIT), Bombay

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: How does foreign direct investment affect domestic product quality? Exploiting FDI liberalization across Indian manufacturing industries, we find that domestic product quality declines on average, but this masks sharply heterogeneous responses. Domestic firms substantially below the quality of foreign competitors upgrade following liberalization, while those near or above foreign quality downgrade. Uncovering a novel mechanism supporting the competition channel, we show that foreign firms occupy an intermediate position on the quality ladder and charge prices comparable to high-quality domestic producers. Greater exposure to such competitors may therefore reduce the returns to maintaining quality substantially above the foreign benchmark, reinforcing competitive pressures to downgrade. Our findings show that domestic firms’ quality responses to foreign entry depend critically on their position relative to foreign competitors.

Keywords: Foreign Direct Investment; Deregulation; Product Quality; Competition (search for similar items in EconPapers)
JEL-codes: F61 L25 L53 O14 O25 (search for similar items in EconPapers)
Pages: 34
Date: 2026-09-30
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=7543098

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:023675

Access Statistics for this paper

More papers in Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL) Contact information at EDIRC.
Bibliographic data for series maintained by Vijayshree ().