Updated Research Progress, George

(Below is an introduction to my topic as well as some sources).

Export Quality, FDI, and Growth in India

There are many studies that show that all exports are not created equal.  Hausman, Hwang, and Rodick (2005) show that increasing export quality leads to GDP per capita growth of over 0.5%.  This result has been confirmed by Jarreau and Poncet (2012) as well as by Gao, Whalley, and Ren (2014). Thus, a goal for developing nations should be to not only increase the quantity of goods exported, but also the quality. One of the most obvious ways to increase product sophistication is through investment in education.  A more educated populous should allow a nation to become more productive and to gain the ability to develop higher quality goods. Nevertheless, education is a long term policy so the effects would not be felt for several years. A more expedient way for a country to export higher quality goods is through foreign direct investment (FDI).

Papers by Iacovone and Javorcik (2008) and Wang and Wei (2008) show that foreign firms located in developing countries such as Mexico and China tend to ship out higher quality goods than their domestic counterparts. If the presence of these foreign firms leads to technological spillovers, then domestic firms could capitalize on the opportunity and upgrade their exports. However, the extent of the gains received by domestic firms are not uniform across countries. The potential benefits depend on both the ability of the target nation to absorb any spillovers as well as the behavior of the foreign firm. In my paper I will try to determine if the export behavior of India’s foreign owned firms is conducive to quality upgrading by domestic firms.

Harding and Javorcik (2012) provide a general overview of how FDI can lead to increases in export quality for domestic firms. One of the factors they look at is the impact of foreign firms producing differentiated goods. Differentiated goods are products that have varying features or levels of quality. In other words, they are not perfect substitutes for each other.  If foreign firms are exporting high quantities of differentiated goods, it stands to reason that domestic firms have more room to upgrade than if foreign firms were instead selling homogenous goods. For example, there is probably a larger quality difference between Indian and American computers than there is for paper produced in those same countries. The economic sector of the foreign firm is another key variable. Alfaro (2003) splits all foreign firms into three sectors: primary goods, services, and manufacturing. Of the three, she finds that manufacturing leads to the greatest gains for the host country. This is because there is greater potential for technological spillovers in manufacturing than in the other two sectors. A third characteristic is R&D intensity. Foreign firms tend to have higher R&D intensity, a fact that naturally leads to higher quality goods.

It then follows that if foreign firms in India produce differentiated goods, are manufacturers, and are R&D intensive, then domestic firms should be able to upgrade their exports. (There may be other important factors for foreign firms to have as well, and I will continue to research these) Therefore, if foreign firms in India are not acting in a way that maximizes benefits to the country, the government may want to consider a new FDI strategy.

 

Alfaro, Laura. “Foerign Direct Investment and Growth: Does Sector Matter?” Harvard Business School, 2003.

Gao, Yue, John Whalley, and Yonglei Ren. “Decomposing China’s Export Growth into Extensive Margin Export Quality and Quantity Effects.” China Economic Review, 2014

Harding, Torfinn and Beata Javorcik. “Foreign Direct Investment and Export Upgrading.” Review of Economics and Statistics, 2012.

Hausman, Ricardo, Jason Hwang, and Dani Rodrik. “What You Export Matters.” Journal of Economic Growth, 2005

Iacovone, Leonardo and Beata Javorcik. “Multi-Product Exporters: Diversification and Micro-level Dynamics.” World Bank Policy Working Research Paper, 2008.

Jarreau, Joachim, and Sandra Poncet. “Export Sophistication and Economic Growth: Evidence from China.” Journal of Development Economics, 2012.

Wang, Zhi and Shang-Jin Wei. “What Accounts for Rising Sophistication in China’s Exports?” NBER Working Paper, 2008.