FDI and incumbent R&D behavior: evidence from Indian manufacturing sector

Purpose The study is an attempt to analyze the impact of foreign direct investment (FDI) on research and development (R&D) behavior of incumbent firms’, both domestic and foreign, operating in Indian manufacturing sector. FDI inflows into the host country escalates the level of competition compelling domestic as well as existing foreign firms to adjust their spending on R&D. The purpose of this paper is to propose that response of domestic and existing foreign firms to the FDI entry vary, with domestic firms increasing their spending on R&D whereas foreign firms reducing it. Design/methodology/approach Using a rich firm level data set from Indian manufacturing for the period 2000-2012, the study utilizes Heckman’s two- step estimation strategy to estimate the impact of FDI entry on R&D behavior of incumbents. Findings FDI entry significantly increases the tendency of domestic and foreign firms to invest in R&D; however, the impact on R&D intensity for both domestic and foreign firms appears to be minimal. Originality/value The study contributes to the existing literature on two fronts. One, unlike other studies, it examines the impact of FDI entry not only on R&D behavior of domestic firms but also on the R&D behavior of existing foreign firms. Second, it addresses the problem of selection bias that has been largely ignored by majority of empirical studies on R&D.