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Institution of State–Business Relation and Its Impact on Manufacturing Productivity Growth in India: A Post-reform Analysis

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  • Vinish Kathuria
  • Rajesh Raj S.N.
  • Kunal Sen

Abstract

Empirical studies on total factor productivity growth (TFPG) in developing countries highlight trade openness, research and development and market structure as being the most important determinants of TFPG. The role of institutions remains overlooked in the literature on the determinants of TFPG. In this article, we look into the role of institutional quality as captured by effective state–business relationships (SBRs) in influencing TFPG, using Indian manufacturing as a case study. By SBRs we mean a set of highly institutionalized, responsive and public interactions between the state and the business sector. To compute TFPG, we use firm level data for both the formal and informal manufacturing sectors. We correct for the simultaneity bias associated with the production function approach for TFPG estimation by employing a method developed by Levinsohn and Petrin. We propose measures of effective SBRs for 15 Indian states over the period 1994–2005, and then use them in TFPG equations to estimate the effect of SBR on TFPG. The results indicate that SBR has positively affected the TFPG of Indian industry. The effect, however, is primarily for the formal sector.

Suggested Citation

  • Vinish Kathuria & Rajesh Raj S.N. & Kunal Sen, 2013. "Institution of State–Business Relation and Its Impact on Manufacturing Productivity Growth in India: A Post-reform Analysis," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 14(1), pages 83-108, March.
    • Handle: RePEc:sae:soueco:v:14:y:2013:i:1:p:83-108
    DOI: 10.1177/1391561413477942
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    More about this item

    Keywords

    State–business relations; total factor productivity; manufacturing; formal and informal sectors; India;
    All these keywords.

    JEL classification:

    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity

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