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The impact of trade liberalization on productivity: Evidence from India's formal and informal manufacturing sectors

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  • Nataraj, Shanthi

Abstract

Despite a large literature investigating the impacts of trade on firm productivity, there is almost no evidence on how small firms react to trade liberalization. Using a unique dataset of firm-level surveys that are representative of the entire Indian manufacturing industry, I show that India's unilateral reduction in final goods tariffs increased the average productivity of small, informal firms, which account for 80% of Indian manufacturing employment but have been excluded from previous studies. In contrast, the increase in productivity among larger, formal firms was driven primarily by the concurrent reduction in input tariffs. By examining the effect of the tariff liberalization on the distributions of productivity and firm size, I find evidence consistent with the exit of the smallest, least productive firms from the informal sector. In addition, I find that although the decline in final goods tariffs did not significantly impact average formal sector productivity, it did increase productivity among the top quantiles of the distribution.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 85 (2011)
Issue (Month): 2 ()
Pages: 292-301

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Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:292-301

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Web page: http://www.elsevier.com/locate/inca/505552

Related research

Keywords: Trade liberalization; Firm productivity; Informal sector;

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Cited by:
  1. Francisco Costa & Jason Garred & Joao Paulo Pessoa, 2014. "Winners and Losers from a Commodities-for-Manufactures Trade Boom," CEP Discussion Papers dp1269, Centre for Economic Performance, LSE.
  2. Paul S. Segerstrom & Yoichi Sugita, 2013. "The Impact of Trade Liberalization on Industrial Productivity," CESifo Working Paper Series 4365, CESifo Group Munich.
  3. Ghani, Ejaz & Kerr, William R. & O'Connell, Stephen D., 2013. "Female business ownership and informal sector persistence," Policy Research Working Paper Series 6612, The World Bank.
  4. Becker, Dennis, 2014. "Heterogeneous Firms and Informality: The Effects of Trade Liberalization on Labor Markets," Working Papers, Cornell University, Department of Applied Economics and Management 180124, Cornell University, Department of Applied Economics and Management.
  5. Ghani, Ejaz & Kerr, William R. & O'Connell, Stephen D., 2013. "The exceptional persistence of India's unorganized sector," Policy Research Working Paper Series 6454, The World Bank.
  6. Ejaz Ghani & Arti Grover Goswami & William R. Kerr, 2012. "Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing," NBER Working Papers 18524, National Bureau of Economic Research, Inc.
  7. Harrison, Ann E. & Martin, Leslie A. & Nataraj, Shanthi, 2011. "Learning versus stealing : how Important are market-share -- reallocations to India's productivity growth?," Policy Research Working Paper Series 5761, The World Bank.
  8. Rajeev H. Dehejia & Arvind Panagariya, 2014. "Trade Liberalization in Manufacturing and Accelerated Growth in Services in India," NBER Working Papers 19923, National Bureau of Economic Research, Inc.
  9. Ghani, Ejaz & Goswami, Arti Grover & Kerr, William R., 2013. "Highway to success in India : the impact of the golden quadrilateral project for the location and performance of manufacturing," Policy Research Working Paper Series 6320, The World Bank.
  10. Ghani, Ejaz & Kerr, William R. & O'Connell, Stephen D., 2013. "Political reservations and women's entrepreneurship in India," Policy Research Working Paper Series 6307, The World Bank.
  11. Ejaz Ghani & Arti Grover Goswami & William R. Kerr, 2012. "Is India's Manufacturing Sector Moving Away From Cities?," NBER Working Papers 17992, National Bureau of Economic Research, Inc.
  12. Ghani, Ejaz & O'Connell, Stephen D. & Sharma, Gunjan, 2013. "Friend or foe or family ? a tale of formal and informal plants in India," Policy Research Working Paper Series 6588, The World Bank.
  13. Rana Hasan & Karl Robert L. Jandoc, 2012. "Labor Regulations and the Firm Size Distribution in Indian Manufacturing," Working Papers, School of International and Public Affairs, Columbia University 1118, School of International and Public Affairs, Columbia University, revised Jan 2012.
  14. Ayadi, Rym & De Groen, Willem Pieter, 2014. "Micro-, Small- and Medium-Sized Enterprises with High-Growth Potential in the Southern Mediterranean: Identifying Obstacles and Policy Responses," CEPS Papers, Centre for European Policy Studies 8796, Centre for European Policy Studies.
  15. Ashkok Kotwal & Bharat Ramaswami & Wilima Wadhwa, 2011. "Economic liberalization and Indian economic growth: What's the evidence?," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers, Indian Statistical Institute, New Delhi, India 11-13, Indian Statistical Institute, New Delhi, India.

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