Trade liberalization and productivity of Indian manufacturing firms

Abstract

Purpose The purpose of this paper is to assess the impact of India’s trade liberalization during the late 1990s and 2000s on productivity of manufacturing firms and verify whether the productivity-enhancing impact of reductions in input tariffs was greater than that of output tariff cuts, as found in some earlier studies. Design/methodology/approach Firm-level (company-level) data drawn from Prowess database are used for the estimation of total factor productivity (TFP) at the firm level, done by using the Levinsohn–Petrin methodology. Econometric models are estimated to explain firm-level TFP. The explanatory variables used are output and input tariff rates and quantitative restrictions on imports at the industry level and firm characteristics such as firm size, export intensity and import intensity. Firm-level panel data for 2002-2010 or for a longer period 1998-2010 are used for the estimation of econometric models. Model estimation is done by applying the fixed-effects model and IV-2SLS, 3SLS estimators and EC2SLS estimators. Findings Trade liberalization had a significant positive effect on the productivity of Indian manufacturing firms. The lowering of output tariff had a greater beneficial impact on TFP of Indian manufacturing firms than the lowering of tariff on intermediate inputs. Originality/value Good deal of care has been taken in the measurement of output and inputs for the purpose of TFP measurement. Two alternative frameworks, gross output and value added, are used. This helps in making a better estimate of the impact of trade liberalization on TFP.

Services input and productivity in Indian manufacturing plants

“…The finding of a positive effect of imported materials on productivity in this study is in agreement with the findings of Goldar and Suresh (2017), Mukherjee (2017) and Satpathy et al (2017). This finding is also consistent with findings of Topalova and Khandelwal (2011) and Goldar et al (2019) in regard to the impact of imported intermediate inputs on TFP of Indian manufacturing firms.…”

“…For example, Topalova and Khandelwal (2011) in their study of India manufacturing firms find that while the pro-competitive effect of import liberalisation (arising from reductions in tariff on imported products that compete with the output of domestic producers) had a positive effect on firm productivity, the bigger impact emerged from the improved access to imported inputs. Similar findings have been reported by Mukherjee (2014) and Goldar et al (2019). It may be added here that Goldar and Suresh (2017) have taken the share of imported materials in total materials used as an explanatory variable is a production function estimated for Indian manufacturing plants based on cross-section data for one year and have found that increases in the share of imported materials lead to increases in TFP.…”

“…The results suggest that, ceteris paribus , a bigger plant is more productive. This finding matches the findings of Satpathy et al (2017), Sharma (2018) and Goldar et al (2019). Since plant size serves as a control variable in equation (1) and the focus of the analysis is not on this variable but on the five key explanatory variables, in the discussion that follows, the results in respect of plant size dummy are not considered any more.…”

“…In studies on TFP in Indian manufacturing, based on firm-level or plant-level panel data, the Levinsohn–Petrin method has been commonly applied. Examples of such application to firm level data include Topalova and Khandelwal (2011), De and Nagaraj (2014), Goldar and Banga (2017), Satpathy et al (2017), and Goldar et al (2018, 2019). The Levinsohn–Petrin methodology for measuring TFP has been applied to plant-level panel dataset prepared from unit-level data of ASI in Sivadasan (2006, 2009), Gupta and Veeramani (2015) and Sahu and Sharma (2016).…”

“…Sharma (2018) has examined the relationship between firm size and productivity in Indian manufacturing using cross-section data of over 7000 firms for a recent year and has found a significant positive relationship between firm size and TFP. The econometric results of the study undertaken by Goldar et al (2019) based on firm level panel data for Indian manufacturing covering the period 1997-1998 to 2009-2010 indicate that TFP is lower for small firms than large firms. Contrary to the findings of the three studies mentioned above, De and Nagaraj (2014) in their study of Indian firms do not find a positive effect of firm size on productivity.…”