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Trade liberalization and heterogeneous firms’ adjustments: evidence from India

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  • Maria Bas

    () (University of Paris 1)

  • Ivan Ledezma

    () (Université de Bourgogne - Franche-Comté)

Abstract

In a developing country, trade liberalization affects firms’ production choices through different channels: intensification of foreign competition, reductions of production factor costs, and enhanced access to foreign consumers and technology. Using firm-level data from India, we investigate how firms with different characteristics adjust their domestic sales and capital accumulation to output and input tariff changes. Our findings suggest that India’s trade liberalization has heterogeneous effects depending on firms’ export, import, ownership status and financial constraints. Firms serving only the domestic market have experienced a contraction of domestic sales and capital accumulation due to import competition. They were not able to benefit from the access to lower costs imported inputs and capital goods. Exporting and importing firms and foreign affiliates have expanded their sales and capital investments thanks to the reduction of imported inputs and capital goods costs and thereby, they have been able to face foreign competition. Our findings also suggest that credit constraints affect the relationship between trade liberalization and firms’ capital accumulation. These findings are in line with recent models of trade with heterogeneous firms.

Suggested Citation

  • Maria Bas & Ivan Ledezma, 2020. "Trade liberalization and heterogeneous firms’ adjustments: evidence from India," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(2), pages 407-441, May.
  • Handle: RePEc:spr:weltar:v:156:y:2020:i:2:d:10.1007_s10290-019-00366-x
    DOI: 10.1007/s10290-019-00366-x
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    More about this item

    Keywords

    Trade liberalization; Firms’ domestic sales and capital accumulation; Heterogeneous firms; Firm-level data;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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