Workers and Multinationals: The Hidden Story of Foreign Investment in India

By Jaya Prakash Pradhan December 6, 2004 696

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Type	Journal article
Title	“Foreign Direct Investment and Labour: The Case of Indian Manufacturing”
Authors	Jaya Prakash Pradhan, Vinoj Abraham & Manoj Kumar Sahoo
Published	2004 · Labour & Development, 10(1), pp. 58–79 · V. V. Giri National Labour Institute
Focus	The employment and wage effects of FDI in Indian manufacturing
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This is a plain-language summary of “Foreign Direct Investment and Labour: The Case of Indian Manufacturing” (Pradhan, Abraham & Sahoo, Labour & Development, 2004).

In short:

A common fear about foreign investment is that it costs local jobs. In Indian manufacturing, this study found no evidence of that — foreign firms’ employment record was no worse than domestic firms’.
Foreign firms paid a wage premium of about 28% on average, and more than double in some sectors.
The study’s overall reading: on the evidence, labour in India benefited from foreign investment rather than being harmed by it.

The question behind the fear

When foreign companies set up in a developing country, a familiar worry follows: will they cost local workers their jobs, or exploit them? This study — by Jaya Prakash Pradhan, Vinoj Abraham, and Mahesh K. Sahoo — tests that worry against the evidence in Indian manufacturing, examining how foreign direct investment actually affected employment and wages. It’s a useful corrective to assumptions made in either direction, because it looks at what the data showed rather than what either boosters or critics expected.

A door that opened slowly

The backdrop is India’s long shift from restricting foreign investment to welcoming it.

For decades after independence — the cautious years, roughly 1948 to 1980 — India tightly restricted foreign capital to protect domestic industry, generally capping foreign ownership at around 40% and requiring local partners. The 1980s brought a gradual warming, with more sectors opened and rules relaxed, especially for export-focused firms. And from 1991, the major reforms threw the door open: automatic approvals, actively courted investment, and FDI caps raised or removed across many sectors. By the time of this study, foreign firms were a meaningful presence in Indian manufacturing — which is what made their effect on workers worth measuring.

What the evidence showed

The findings cut against the pessimistic expectation on both counts.

On wages, foreign firms paid noticeably more — about a 28% premium on average over comparable domestic firms, rising to more than double in some sectors such as textiles. Crucially, that premium held up even after accounting for other factors, so it wasn’t simply a reflection of foreign firms hiring more skilled workers. On jobs, the study found no adverse employment effect: foreign firms were no worse for manufacturing employment than their domestic counterparts, with no evidence that foreign investment reduced jobs. Both foreign and domestic firms were becoming more technology-intensive over the period, and domestic firms were adapting to compete — but the feared wave of foreign-investment-driven job destruction simply didn’t appear in the data.

Why it matters

The study’s measured conclusion is that, on this evidence, labour benefited from foreign investment in India: better pay without job losses. For workers, that meant higher-paying opportunities at foreign firms, possible knock-on effects on domestic wages (the study treats the spillover as plausible rather than firmly established), and exposure to international practices. For policymakers, it suggested FDI can be worker-friendly — while still flagging the need to balance automation with employment, keep markets competitive, and invest in skills so that the wage gains are broadly shared. It’s worth reading these findings as a snapshot of Indian manufacturing in the late 1990s and early 2000s rather than a timeless verdict — but as a corrective to the assumption that foreign investment must hurt workers, the evidence was clear.

Read the academic abstract

This paper evaluates the employment and wage effects of FDI in Indian manufacturing. The findings suggest that foreign firms do not have any adverse effect on manufacturing employment in India compared with their domestic counterparts, while they pay their workers significantly more. The study therefore implies that labour, in fact, benefited from foreign investment in India.

Cite this article

Pradhan, J. P., Abraham, V., & Sahoo, M. K. (2004). Foreign direct investment and labour: The case of Indian manufacturing. Labour & Development, 10(1), 58–79.

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