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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.

Suggested Citation

  • Nataraj, Shanthi, 2011. "The impact of trade liberalization on productivity: Evidence from India's formal and informal manufacturing sectors," Journal of International Economics, Elsevier, vol. 85(2), pages 292-301.
  • Handle: RePEc:eee:inecon:v:85:y:2011:i:2:p:292-301
    DOI: 10.1016/j.jinteco.2011.07.003
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    More about this item

    Keywords

    Trade liberalization; Firm productivity; Informal sector;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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