Impact of foreign ownership on firm’s performance: a study of Indian manufacturing industry

It is generally believed that a FDI firm tends to have a higher TFP than a domestic firm. However, the finding that FDI firms tend to have relatively higher TFP than domestic firms do not by themselves mean that foreign acquisition has led to an improvement in TFP. There is a possibility of cherry picking by foreign investors, that is they may have invested in the relatively more productive firms. An approach that may be taken to study the impact of foreign ownership on productivity is to consider the change that takes place in the level of TFP in a domestic firm when it gets acquired by a foreign investor and compare it with what would have happened to TFP if it had remained a domestic firm. Since it is not possible to observe the same firm in both situations, we use a domestic firm that is similar in characteristics to the firm that is acquired as counterfactual. Thus, we compare the performance of a firm that receives foreign investment to the performance of the firm’s identical twin (or multiple) with no foreign investment. Thus, this paper empirically examines the relationship between ownership change from domestic to foreign and firm performance using data of the manufacturing sector from Centre for Monitoring Indian Economy(CMIE) for the period of 2000–2019 and used propensity score matching along with difference-in-differences estimator. The results show that the effect of foreign ownership on productivity is not statistically significant but a statistically significant and positive impact on trade intensity of manufacturing sector.