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Competing or Collaborating Siblings? Industrial and Trade Policies in India

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Abstract

This paper investigates the link between economic de-regulationdomestic as well as trade de-regulationand firm-level productivity using two unique data sets. We use the industrial licensing regime in India (operating from the 1950s onwards) and its gradual relaxation during the 1980s and 1990s to test whether industrial de-regulation that leads to more competition domestically, affects firm-level productivity. To our knowledge, ours is the only detailed data set on Indian industrial policy. Our firm-level data for the period 1980-94 is a census of firms in India and has been rarely used in literature. We also use the interesting chronology of reforms in India (industrial de-regulation in the 1980s and trade reforms in 1991) to test whether industries that faced more competition domestically tend to perform better when facing foreign competition. Our identification strategy uses an important institutional feature of Indian policy. Firms with assets below a certain defined rupee threshold were exempt from licensing requirements. This institutional feature provides us within-industry variation that allows us to identify the interaction between de-licensing and exemption status. We find that industrial de-regulation during the 1980s led to a significant rise in firm productivity. Further preliminary results suggest that there exists a strategic complementarity relationship between industrial and trade policiesindustries and firms that were de-licensed tend to perform better vis productivity after trade liberalization. Our results are robust to the inclusion of a wide variety of firm and industry fixed effects and controls for policies other than de-licensing that may affect productivity. This paper contributes to the literature by being the only detailed empirical analysis of the industrial licensing regime in India, especially the de-licensing that took place during the 1980s and by providing evidence of the crucial link between trade and industrial de-regulation.

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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0610.

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Length: 67 pages
Date of creation: 29 Aug 2006
Date of revision:
Handle: RePEc:umc:wpaper:0610

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Keywords: India; Trade liberalization; reforms; industrial policy; industrial licensing; firm-level productivity; market structure; complementarity;

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References

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  17. Paolo Epifani, 2002. "Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?," Development Working Papers 172, Centro Studi Luca d\'Agliano, University of Milano.
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Citations

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Cited by:
  1. Bloom, Nicholas & Schweiger, Helena & Van Reenen, John, 2011. "The land that Lean manufacturing forgot? Management practices in transition countries," CEPR Discussion Papers 8493, C.E.P.R. Discussion Papers.
  2. Chamarbagwala, Rubiana & Sharma, Gunjan, 2011. "Industrial de-licensing, trade liberalization, and skill upgrading in India," Journal of Development Economics, Elsevier, vol. 96(2), pages 314-336, November.
  3. Pandey, Manish & Dong, Xiao-yuan, 2009. "Manufacturing productivity in China and India: The role of institutional changes," China Economic Review, Elsevier, vol. 20(4), pages 754-766, December.
  4. Albert Bollard & Peter Klenow & Gunjam Sharma, 2013. "India's Mysterious Manufacturing Miracle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 59-85, January.
  5. Rubiana Chamarbagwala & Gunjan Sharma, 2008. "Industrial Deregulation, Skill Upgrading, and Wage Inequality in India," Caepr Working Papers 2008-002, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. 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.
  7. Aidt, T.S. & Dutta, J., 2008. "A Theory of the Corrupt Keynesian," Cambridge Working Papers in Economics 0861, Faculty of Economics, University of Cambridge.

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