FDI Liberalisation, firm heterogeneity and foreign ownership: German firm decisions in reforming India

The paper investigates the role of firm-level productivity and industry-level R&D for multinational enterprises' (MNEs') choice of undertaking foreign direct investment (FDI), and the share of ownership in foreign affiliates. Two firm-specific datasets on German MNEs with varying equity stakes in Indian affiliates are used to account for the two-step decision process. The paper also analyses how German firm decisions were affected by the liberalisation of FDI regulations in India. Results show remarkable differences between the selection and the ownership share equation, and also between the pre-reform and post-reform periods. The evidence clearly reveals the trade-offs involved in selective FDI approvals and foreign ownership restrictions.