Liberalization, Internationalization, Advantages and Foreign Direct Investment: The Indian Experience in the 1980s

This article examines the impact of economic reforms introduced in the mid-1980s on the inter-industry distribution of value-added activities by transnational corporations in a sample of 48 Indian industries. It reveals a complex relationship between policy changes, market conditions and internalization advantages. Economic reforms in a host country not only confer greater freedom on transnational corporations in their choice to internalize or not, but also affect market conditions which, in turn, influence this choice. As the impact of market conditions varies across industries, economic reforms may lead to a changing relationship between inter-industry variation in foreign ownership and its determinants. The empirical findings of the study suggest that, in the aftermath of policy reforms in the mid-1980s, the importance of the competitive advantages of transnational corporations and of the locational advantages of the host country increased significantly while that of market structure and concentration declined in explaining the inter-industry variation of foreign ownership in the Indian manufacturing sector.