Spillover Effects of Foreign Direct Investment on Firms' Exports: Evidence From India

ABSTRACT Owing to economic globalisation, foreign direct investment (FDI) inflows and exports have increased considerably in India. Using a firm‐level panel data ranging from 2012 to 2022, this study examines the spillover effect of FDI on Indian firms' export propensity. The empirical results reveal that within‐industry FDI generates a substantial export spillover effect that facilitates local firms to undertake exporting, but inter‐industry FDI does not have such an effect. Specifically, absorptive capability helps learn exporting knowledge and plays a key role in mediating the spillover effect. Further analyses find that the demonstration effect of FDI applies to manufacturing rather than service sectors. The net spillover effects, measured by the market share and research & development activities of foreign firms, also vary between manufacturing and service sectors in India.