fdi in india and its growth linkages - Department Of Industrial Policy ...

Executive Summary
Foreign direct investment (FDI) has played an important role in the process of globalisation during the past two decades.
The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes
in technologies, greater liberalisation of trade and investment regimes, and deregulation and privatisation of markets in
many countries including developing countries like India.
Capital formation is an important determinant of economic growth. While domestic investments add to the capital
stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between
domestic savings and investment. At the macro-level, FDI is a non-debt-creating source of additional external finances.
At the micro-level, FDI is expected to boost output, technology, skill levels, employment and linkages with other sectors
and regions of the host economy.
The present study aims at providing a detailed understanding of the spatial and sectoral spread of FDI-enabled
production facilities in India and their linkages with the rural and suburban areas. The corresponding impact on output,
value added, capital and employment in the regions receiving FDI has also been worked out.
The analysis is based on primary as well as secondary data. While the primary survey provides limited information for
the requisite analysis, the secondary database has been a major source of detailed firm- and plant-level analysis. The
secondary database provided a rich source of plant-level data which has been used extensively in the analysis. The
Capitaline database provides data on more than 14,000 Indian listed and unlisted companies classified under more than
300 industries. The information used is based on FDI actually received.
All firms with foreign equity participation of 10 per cent and above have been considered to be FDI-enabled firms or
“FDI firms”. All other firms, with less than 10 per cent foreign equity, are referred to as “domestic firms”. The analysis
of the secondary data has been undertaken to cover the issues of a) spatial spread and reasons thereof; b) sectoral
clustering; c) depth of value added; d) employment-generating effects; e) labour and capital intensity; f ) comparative
performance of FDI and domestic firms; and g) export potential.
Based on the population data compiled in the Population Census 2001, the cities / towns of FDI-enabled production
facilities have been grouped into three classes of cities based on their size, viz., Class-1, Class-2 and Class-3 cities.
Class-1 cities are towns with a population of 1,000,000 (one million) and above, Class-2 cities are towns with a
population between 5,00,000 and 1,000,000, and Class-3 cities are towns with a population of less than 5,00,000. It
is assumed that Class-3 cities (also referred to as small cities) are likely to be towns which are suburban and closer to
rural areas of the country. The purpose of introducing city-size classes is to locate the movement and final plant
location of FDI firms. The more the FDI moves into Class-3 cities, the higher its linkage with suburban/rural regions
of the country.
The data of 351 FDI firms with 1,171 plants spread over 275 cities have been used to gauge the current economic
performance of these plants during the period April 2006 to March 2008. This information has been used to study
agglomeration / clustering issues, as well as other performance indicators of firms and plants and NIC 3-digit sectors across