Comparative performance of foreign affiliates and domestic firms in the Indian machinery industry

The objective of this paper was to empirically examine the differences in the relative characteristics, conducts and performance of two ownership groups of firms, foreign affiliates of MNEs (FAs) and domestic firms (DFs), in the context of Indian machinery industry (IMI) during the period 2000/01 to 2006/07. For this purpose, we applied three alternative techniques, namely, univariate statistical method based on Welch's t-test comparing the mean value of a variable between two groups of firms, the multivariate linear discriminant analysis and dichotomous logit and probit models. The common and significant findings of the statistical analysis suggest that FAs have the greater technical efficiency, firm size, export intensity, intensity of import of intermediate goods and intensity of import of disembodied technology but the lower advertisement and marketing intensity and financial leverage. These findings also give some indications about the quality of FDI that has come to the IMI during the aftermath of economic reforms. First, it seems that the superior resources and capabilities of FAs confer them higher technical efficiency (but not overall performance or the monopoly power) and export intensity in relation to DFs. Second, as the intensity of import of intermediate goods in FAs is significantly higher than that of DFs, the former group tends to have fewer linkages with domestic suppliers of intermediate goods including capital goods, raw material, components and spare parts. In other words, DFs with their activities in the IMI are providing higher linkages with the indigenous suppliers. Third, the combined results on higher expenses on import of intermediate goods and import of foreign technology by FAs and no difference in gross profit margins between FAs and DFs point out that the FAs are probably engaged in the transfer of profits to the MNE system through intra-firm trade. This aspect, however, require further research which is beyond the scope of this study. Fourth, despite the higher import of intermediate goods and disembodied technologies, FAs are not spending higher amounts on R&D towards adaptation or/and absorption of the imported technology and indigenization of the imported inputs. As a result, R&D intensities of FAs and DFs are the same. Thus, we conclude that our empirical analysis supports the proposition that the FAs and DFs differ in terms of the many aspects of conducts and performance in the IMI.