This paper studies characteristics of optimal investment decisions of risk-averse firms who engage in exports under two types of risks: endogenous and background risks. While endogenous risk arises from the fluctuations in spot exchange rate and affects directly the profit of an exporting firm, background risk arises from uncertain changes in firm-and industryspecific domestic and foreign policies. We propose a mean-variance decision-theoretic model to trace out impact of perturbations in the distributions of these uncertainties on the optimal investment strategy. A testable empirical model is derived and applied to a panel of 840 exporting Indian manufacturing firms for the period 1995-2015. Our results suggest that Indian manufacturing exporters depict decreasing absolute risk aversion and that firms' risk preferences are prone to variance vulnerability.

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The textile industry is one of India's major industries in terms of output, investment, and employment. It accounted for 4 % of India's GDP, 14 % of total industrial production, and 11 % of total export earnings in 2012. The industry employs around 45 million people, second only to agriculture. A wide range of textile products are produced and exported from India. Exports of most textile products registered high growth during the 2005-2009 period. The industry and its various subsectors have also experienced a significant reduction in domestic tariff and nontariff barriers over the last decade in addition to liberalization in the global market following the phasing out of the MFA. This chapter examines the impact of India's trade liberalization on firm-level performance in terms of profitability, sales revenues, and imports of raw material for different subsectors of India's textile industry over the 2000-2009 period. It makes use of firm-level panel data from the CMIE−Prowess database to determine this impact. It also analyzes how this impact has been influenced by various firm-specific characteristics. The main finding from this analysis is that there has been an improvement in firm-level profitability and sales and an increase in imported raw materials due to domestic trade liberalization. The analysis also shows that the effect has been stronger through the input sourcing channel, mainly due to the removal of quantitative restrictions on inputs used by the textile industry and that larger firms have been able to gain more from trade liberalization. The analysis and methodology used for the textile industry can be used in similar firm-level studies for other important industries in India.

We build a two‐moment decision‐theoretic framework to study how firms in the food‐processing industry negotiate between risk and return while relying on imported inputs for production at an intensive margin. Two possibilities emerge: either a co‐movement or a trade‐off in risk and return under various industry and economic conditions. Building on our theoretical setting, we design a testable empirical framework that considers a panel of 316 firms in the Indian food‐processing industry between 1993 and 2009. We find strong evidence of a decrease in the absolute risk aversion preference, although the magnitude varies measurably across firms.