Foreign direct investments and spillover effect on entrepreneurial activities in India: an empirical study

Purpose This study investigates the impact of foreign direct investments on the growth of entrepreneurial activities based on indirect linkages established between foreign affiliates and local micro, small and medium enterprises in India. Since foreign direct investment is not allowed in the micro, small and medium enterprise sector, the study uses an indirect linkage approach to determine the magnitude and direction of the association between foreign capital inflows and the rate of change in entrepreneurial activities. Methodology For investigation, the researcher used the following variables based on past studies: coefficient of backwards and forward intersectoral linkages, inflows of foreign capital sector-wise, gross domestic products, exports, employment and number of working enterprises registered in the micro, small and medium enterprise sector of India. Data for the present study was derived from the annual report of micro, small and medium enterprises of India, Department of Industrial Policy and Promotion, foreign direct investment fact sheet, Central Statistics Office of India and Asian Development Bank for input-output and supply-use table to estimate the coefficient of forward and backward linkages. Due to limited data availability and irregularity in the maintenance of records of the micro, small and medium enterprise sector, the study's time frame is limited from 2006 to 2017 (due to the unavailability of data of the micro, small and medium enterprise sector). The coefficient of backward and forward linkages is estimated by the Rasmussen method from the input-output table, and to analyse the data, a simple panel linear model is used. Panel corrected the standard error for robust standard error and the Hausman-Taylor instrument variable to check the robustness of the outcome of the linear model and control the diagnostic issue related to the linear model. The result indicated a positive and significant association between foreign direct investment inflows and the growth of entrepreneurial activities, not allowed in the micro, small and medium enterprise sector; the coefficient of forward linkages positively encouraged entrepreneurship, but backward linkage failed to do the same. This result shows the market-seeking motive of foreign affiliates in India and less dependency on local firms for input supply and manufacture of final products and hence discouraging the entrepreneurial activities in the upward vertical sector and sometimes situation of "crowding-out effects ". This finding will help policymakers to correct the lacuna and develop policy measures to improve the linkage between foreign affiliates and local firms, especially backward linkages.