Journal Article

FDI Liberalization, Firm Heterogeneity and Foreign Ownership: German Firm Decisions in Reforming India

Journal of Development Studies

We contribute to the literature on the heterogeneity of multinational enterprises (MNEs) and the relevance of firm and industry characteristics for analyzing the determinants of outward foreign direct investment (FDI). The focus is on the role of firm-level productivity and industry-level R&D when MNEs decide on whether or not to undertake FDI and on the share of ownership in foreign affiliates. We combine two firm-specific datasets on German MNEs with varying equity stakes in Indian affiliates. We account for the two-step decision process of German MNEs by employing Heckman models. At the same time, we analyze how German firm decisions were affected by the liberalization of FDI regulations in India. We find remarkable differences between the selection and the ownership share equation, and also between the pre-reform and post-reform periods. The evidence has important policy implications and clearly reveals the trade-offs involved in selective FDI approvals and foreign ownership restrictions.

Authors

Henning Mühlen
Peter Nunnenkamp