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Industry-level determinants of India’s vertical and horizontal IIT

Author

Listed:
  • Sagnik Bagchi

    (The LNM Institute of Information Technology)

  • Surajit Bhattacharyya

    (Indian Institute of Technology Bombay)

Abstract

This paper mitigates the gap in the Indian context about the non-consideration of vertical and horizontal intra-industry trade (IIT) distinctly in testing empirical hypotheses about industry-level determinants of IIT. Our study indicates that failure to segregate vertical and horizontal IIT from the total IIT possibly leads to potential bias in econometric results. Drawing on annual multilateral trade data encompassing two and half decades of the liberalization period, we find India’s IIT outpaced the growth of inter-industry trade over the years and its contribution mainly came from six manufacturing industry groups whose export baskets had been loaded with low vertically differentiated goods. However, horizontal and high vertical IIT have gained some momentum since the end of the last decade. Given the fractional nature of our dependent variable, we initially estimate a (random effects) Tobit model followed by the Exponential Regression of Fractional Response model. The robust econometric findings show that product differentiation has a positive impact only on total IIT. Whereas vertical and horizontal IIT are promoted in industries with concentrated and competitive market structures, respectively. The prevalence of concentrated market structure indicates that (large) Indian firms sustain import competition by specializing in low vertically differentiated goods, as they efficiently adjust to resource reallocation.

Suggested Citation

  • Sagnik Bagchi & Surajit Bhattacharyya, 2021. "Industry-level determinants of India’s vertical and horizontal IIT," Indian Economic Review, Springer, vol. 56(1), pages 113-145, June.
  • Handle: RePEc:spr:inecre:v:56:y:2021:i:1:d:10.1007_s41775-021-00107-8
    DOI: 10.1007/s41775-021-00107-8
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    More about this item

    Keywords

    Horizontal and vertical IIT; Revealed comparative advantage; Manufacturing industry; (Random effects) Tobit model; Exponential regression of fractional response model;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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