Foreign Firms' Entry into Indian Manufacturing: Boosting Productivity Amid Rising Environmental Costs

Recent Surge in Foreign Investment in India's Manufacturing Sector

India's manufacturing sector has witnessed a remarkable influx of foreign direct investment (FDI), positioning the country as a key player in global supply chains. In fiscal year 2024-25, FDI into manufacturing reached US$19.04 billion, marking an 18 percent year-on-year increase from US$16.12 billion the previous year. Overall FDI equity inflows for April-December 2025 (FY26) climbed to Rs. 4,16,709 crore (US$47.87 billion), up 18 percent, with manufacturing benefiting significantly alongside services and IT. Initiatives like Make in India and Production Linked Incentive (PLI) schemes have attracted giants such as Apple, Samsung, and Hyundai, diversifying from China amid geopolitical shifts.

This capital infusion promises economic acceleration, but recent research highlights a dual-edged sword: enhanced business productivity juxtaposed with escalating environmental costs. Empirical studies using firm-level data reveal how foreign entry catalyzes efficiency gains while potentially straining ecological resources.

Mechanisms Through Which Foreign Firms Enhance Productivity

Foreign direct investment (FDI), defined as investment made by a firm or individual in one country into business interests in another, typically involves establishing operations or acquiring stakes in domestic enterprises. In Indian manufacturing, FDI spillovers—indirect benefits to local firms—occur via three channels: horizontal (intra-industry competition and demonstration effects), backward (supply to foreign firms, upgrading suppliers), and forward (access to advanced inputs from foreign buyers).

Demonstration effects expose domestic firms to superior technologies and management practices, fostering imitation. Competition compels locals to innovate, while vertical linkages transfer knowledge through supplier-buyer relationships. A 2025 study by Chandrakanti Behera, analyzing firm-level panel data from 2010-2018, found backward spillovers from downstream multinationals as the primary driver of total factor productivity (TFP) gains, though offset partially by negative forward spillovers. TFP, a measure of efficiency in converting inputs to outputs, rose notably in supplier industries.

Similarly, BR Mishra's 2024 analysis of 2003-2017 data confirmed positive horizontal and backward spillovers on productivity, mediated by firm absorptive capacity like R&D spending. These effects are pronounced in technology-intensive sectors, where foreign presence averages 20-30 percent.

Empirical Evidence of Productivity Boosts from FDI Spillovers

Multiple econometric studies affirm FDI's role in elevating Indian manufacturing productivity. Using Annual Survey of Industries (ASI) data, researchers estimate production functions to isolate spillovers. For instance, Behera's semi-parametric approach addressed endogeneity, revealing industry heterogeneity: high-tech sectors like electronics gain more from backward linkages, with TFP increases up to 15 percent.

A World Bank analysis of plant-level data showed varied input use correlates with higher productivity in FDI-exposed regions, with small firms benefiting least due to scale disadvantages. Aggregate manufacturing TFP grew 2-3 percent annually post-liberalization, partly attributable to FDI, per Goldar (2015, updated works).

This table summarizes spillover estimates from recent studies, highlighting automotive leadership.

The Environmental Downside: Increased Pollution and Emissions

While productivity surges, environmental costs mount. The pollution haven hypothesis posits lax regulations attract 'dirty' FDI, relocating emissions to India. Empirical evidence supports this: Singhania (2021) found FDI significantly raises environmental degradation, confirming pollution havens. Chandrika (2022) showed cross-border acquisitions by high-emitting countries target polluting Indian firms.

Scale effects amplify absolute emissions as output grows; composition effects shift to emission-intensive industries. Finn Ole Semrau's 2026 study on GVC upstreamness links higher emissions (28 percent more direct CO2) to energy-intensive positions, though foreign regulations mitigate via supply chains. Read the full Semrau study.

B Goldar (2025) notes FDI plants have lower CO2 intensity but spillovers vary regionally; overall manufacturing emissions rose 5 percent annually with FDI growth.

Photo by Shubham Nayak on Unsplash

Case Study: Automotive Sector – Productivity Leader with Emission Challenges

India's auto industry, with FDI from Suzuki, Hyundai, and Tesla, exemplifies gains. Supplier networks upgraded via backward spillovers, boosting TFP 12-18 percent. Maruti Suzuki's local content exceeds 95 percent, transferring tech to 300+ vendors.

Yet, emissions surged: Tamil Nadu's Chennai cluster (auto hub) saw PM2.5 levels 40 percent above norms, per CPCB data. Water use tripled, straining resources. Balancing via EV push under PLI mitigates, but legacy ICE plants pollute.

Electronics and Textiles: Mixed Outcomes

Electronics FDI (Foxconn, Pegatron for Apple) under PLI hit $10B in FY25, elevating productivity via automation; iPhone output doubled, TFP up 20 percent in suppliers. Environmentally, e-waste and chemical effluents rose 15 percent in Tamil Nadu.

Textiles, with FDI from Raymond and Aditya Birla, gained efficiency but dyeing units pollute rivers; Ganga basin saw 30 percent dye discharge increase post-FDI boom.

Policy Responses and Green FDI Imperative

Government counters via National Clean Air Programme and PLI green incentives. Goldar (2022) shows ISO 14001 adopters cut emissions 20 percent. FDI norms eased for renewables, attracting Siemens, GE.

Experts advocate 'green FDI' screening, tech transfer mandates. IMF (2026) urges innovation for 40 percent productivity boost without env trade-offs. Explore Behera's spillover analysis.

Stakeholder Perspectives and Future Outlook

Industry lauds productivity (CII: 15 percent GVA rise), env NGOs decry costs (CSE: 25 percent emission spike). IMF projects manufacturing at 25 percent GDP by 2030 if green tech integrated.

Actionable insights: Firms adopt ESG; policymakers enforce BAT (Best Available Techniques); researchers track spillovers longitudinally.

Photo by Tek Bahadur on Unsplash

• Enhance absorptive capacity via R&D subsidies.
• Impose env impact assessments for FDI.
• Promote circular economy in clusters.

Balancing Growth: Pathways Forward

Sustainable manufacturing demands FDI with strings: mandatory clean tech, monitoring. India's PLI 2.0 eyes $500B investment by 2030, prioritizing green. With vigilant policy, productivity gains can coexist with env stewardship, propelling Viksit Bharat.