Has liberalization affected profit margins in Indian Industry?

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Has liberalization affected profit margins in Indian Industry?

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Uma S. Kambhampati
Ashok Parikh

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Abstract

In this article, we analyse the determinants of firm-level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980-98, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables - advertising, Research and Development (R&D), capital-output ratios and managerial remuneration - though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected. Copyright Blackwell Publishers Ltd and the Board of Trustees of the Bulletin of Economic Research, 2005.

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Article provided by Blackwell Publishing in its journal Bulletin of Economic Research.

Volume (Year): 57 (2005)
Issue (Month): 3 (07)
Pages: 273-304
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Handle: RePEc:bla:buecrs:v:57:y:2005:i:3:p:273-304

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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