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Disciplining firms: the impact of trade reforms on profit margins in Indian industry

  • Uma Kambhampati
  • Ashok Parikh

The paper analyses the effects of increased trade exposure on the profitability of firms in Indian industry. While trade reforms are often expected to decrease profit margins as firms struggle to compete in international markets, there is the possibility that increased competition may improve firm efficiency and provide a positive impetus to firm profitability. This paper is different from many others in this area in that it considers both these possibilities. An efficiency index is created to directly analyse the impact of changing efficiency levels on firm profit margins. Results indicate that liberalization significantly influenced profit margins. However, its main effect is through the impact that it has had on other firm variables - market shares, advertising, R&D and exports - all of which changed after 1991. While exports have had a pro-competitive effect on profit margins in the selected sample, AD and R&D both cause an increase in profit margins. It is also found that neither capital nor managerial capabilities (as proxied by remuneration) are particularly effective in increasing profit margins.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840210155177
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 4 ()
Pages: 461-470

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Handle: RePEc:taf:applec:v:35:y:2003:i:4:p:461-470
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References listed on IDEAS
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  1. Levinsohn, J., 1991. "Testing the Imports-As-Market-Discipline Hypothesis," Working Papers 272, Research Seminar in International Economics, University of Michigan.
  2. Nigel L. Driffield & Uma S. Kambhampati, 2003. "Trade Liberalization and the Efficiency of Firms in Indian Manufacturing," Review of Development Economics, Wiley Blackwell, vol. 7(3), pages 419-430, 08.
  3. Nickell, S.J., 1993. "Competition and Crporate Performance," Economics Series Working Papers 99155, University of Oxford, Department of Economics.
  4. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 87-105, Winter.
  5. Minami, Ryoshin & Hondai, Susumu, 1995. "An Evaluation of the Enterprise Reform in China: Income Share of Labor and Profitability in the Machine Industry," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 36(2), pages 125-143, December.
  6. Devarajan, Shantayanan & Rodrik, Dani, 1989. "Trade Liberalization in Developing Countries: Do Imperfect Competition and Scale Economies Matter?," American Economic Review, American Economic Association, vol. 79(2), pages 283-87, May.
  7. Lall, Sanjaya, 1999. "India's Manufactured Exports: Comparative Structure and Prospects," World Development, Elsevier, vol. 27(10), pages 1769-1786, October.
  8. Pravin Krishna & Devashish Mitra, . "Trade Liberalization, Market Discipline and Productivity Growth: New Evidence From India," Working Papers 96-8, Brown University, Department of Economics.
  9. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  10. Kunal Sen & S. Chand, 1999. "Competitive Pressures From Trade Exposure: Evidence from Indian Manufacturing," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 34(2), pages 113-126, July.
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