The impact of inward FDI and foreign ownership on the performance of Indian multinational firms

Mergers and acquisitions (M&A) account for a large part of foreign direct investment (FDI). Large deals attract major and often controversial resonance in public debates and are often accompanied by political action. In order to separate myths from facts we analyze the effects of foreign take-overs on the performance of MNEs in India. Our analysis proceeds in two steps. First, we compare foreign owned and domestic multinationals with regard to size and productivity with new Indian data on the firm level which link information about FDI and domestic performance. Second, we analyze the dynamic impact of ownership change on the development of productivity and employment. We control for a possible selection bias and use a propensity score matching estimator. Building on Pfaffrmayr and Bellak (2000) we develop a procedure for identifying the, pure’ ownership effect. We find that foreign owned multinationals are smaller but more productive than their domestic counterparts while paying similar wages. The development of several performance indicators is found to be quite heterogeneous. While the average effect of ownership change on employment is insignificant, the causal effect on total and labor productivity is positive and significant.