Does Plant Size Matter? Differential Effects of FDI on Wages and Employment in Indian Manufacturing

Shruti Sharma

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This paper considers the differential effects of industry-level Foreign Direct
Investment (FDI) on plant-level employment and wages of skilled and unskilled
workers of India’s manu- facturing sector, based on the size of the plant. I find that there are strong positive differential effects to big plants in terms of employment and average wages of both skilled and unskilled workers relative to average sized and small plants with increased industry-level inward FDI. Further, this relative increase in employment of production workers at big plants is biased to- wards male workers. Average sized and smaller plants experience negative effects of inward FDI which can be explained in terms of intra-industry reallocation of output from smaller to bigger plants and poaching of higher quality production and skilled workers by bigger plants as industry-level FDI increases. However, in a more detailed analysis, I find that in regions where FDI inflows are large and persistent, there are strong positive effects in terms of increases in skill composition and wage-skill premium to both big and small plants alike. This suggests that for plants to experience positive effects of industry-level FDI, a critical mass of inward FDI needs to be achieved. The findings are important especially in the context of India’s recent Make-in-India campaign which combined with the objectives of the National Manufacturing Policy and the National Skill Development Corporation strives to increase India’s productive capacity in order to generate positive employment effects, and especially increase the pool of skilled workers in India’s manufacturing sector.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherAsia Research Centre. Copenhagen Business School
Number of pages47
Publication statusPublished - 2016
Externally publishedYes
SeriesCopenhagen Discussion Papers

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