Does Investment Origin Matter to The Direct Effect of FDI on Firm Productivity? : The Case of Indian Firms

We estimated the direct effect of foreign acquisition on target firms’ productivity in India based on propensity score matching difference-in-differences(PM-DID) methodology. Especially, to control for possible endogeneity that causes biased estimations of the direct effect of FDI, we account for the source of FDI, referred to as the “origin” heterogeneity in terms of either region or country (i.e. EU, USA, and Asian firms), thus examining whether the result differs from baseline estimation. The finding reveals that the productivity gains of targets vary by source of FDI, suggesting that the productivity improvement of the acquired firm can be as large as the “technology-transfer capacity” of the foreign investor, depending on the origin. In other words, acquisition targets may benefit more when they are acquired by investors that are more advanced or developed and that have superior transfer capacity in terms of the technology or knowledge level (i.e., the innovation level), business and cultural similarity, and geographical proximity