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Competing or Collaborating Siblings? Industrial and Trade Policies in India

This paper investigates the link between economic de-regulation domestic as well as trade de-regulation and firm-level productivity using two unique data sets. We use the industrial licensing regime in India (operating from the 1950s onwards) and its gradual relaxation during the 1980s and 1990s to test whether industrial de-regulation that leads to more competition domestically, affects firm-level productivity. To our knowledge, ours is the only detailed data set on Indian industrial policy. Our firm-level data for the period 1980-94 is a census of firms in India and has been rarely used in literature. We also use the interesting chronology of reforms in India (industrialde-regulation in the 1980s and trade reforms in 1991) to test whether industries that faced more competition domestically tend to perform better when facing foreign competition. Our identification strategy uses an important institutional feature of Indian policy. Firms with assets below a certain defined rupee threshold were exempt from licensing requirements. This institutional feature provides us within-industry variation that allowsus to identify the interaction between de-licensing and exemption status. We find that industrial de-regulation during the 1980s led to a significant rise in firm productivity. Further preliminary results suggest that there exists a strategic complementarity relationship between industrial and trade policies industries and firms that were de-licensedtend to perform better vis productivity after trade liberalization. Our results are robust to the inclusion of a wide variety of firm and industry fixed effects and controls for policies other than de-licensing that may affect productivity. This paper contributes to the literature by being the only detailed empirical analysis of the industrial licensing regime in India, especially the de-licensing that took place during the 1980s and by providing evidence of the crucial link between trade and industrial de-regulation.

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File URL: https://economics.missouri.edu/working-papers/2006/wp0610_sharma.pdf
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0610.

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Length: 67 pages
Date of creation: 29 Aug 2006
Date of revision:
Handle: RePEc:umc:wpaper:0610
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  1. Zilibotti, Fabrizio & Redding, Stephen & Burgess, Robin & Aghion, Philippe, 2005. "Entry Liberalization and Inequality in Industrial Performance," Scholarly Articles 4481508, Harvard University Department of Economics.
  2. Schmidt, Klaus M., 1996. "Managerial Incentives and Product Market Competition," CEPR Discussion Papers 1382, C.E.P.R. Discussion Papers.
  3. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  4. Simeon Djankov & Peter Murrell, 2002. "Enterprise Restructuring in Transition: A Quantitative Survey," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 739-792, September.
  5. James R. Tybout, 2000. "Manufacturing Firms in Developing Countries: How Well Do They Do, and Why?," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 11-44, March.
  6. Epifani, Paolo, 2003. "Trade liberalization, firm performance, and labor market outcomes in the developing world : what can we learn from micro-level data?," Policy Research Working Paper Series 3063, The World Bank.
  7. Pravin Krishna & Devashish Mitra, . "Trade Liberalization, Market Discipline and Productivity Growth: New Evidence From India," Working Papers 96-8, Brown University, Department of Economics.
  8. Rodrik, Dani & Subramanian, Arvind, 2004. "From 'Hindu Growth' to Productivity Surge: The Mystery of the Indian Growth Transition," CEPR Discussion Papers 4371, C.E.P.R. Discussion Papers.
  9. Mathias Dewatripont & Philippe Aghion & Patrick Rey, 1999. "Competition, financial discipline and growth," ULB Institutional Repository 2013/9619, ULB -- Universite Libre de Bruxelles.
  10. Acemoglu, Daron & Aghion, Philippe & Zilibotti, Fabrizio, 2002. "Distance to Frontier, Selection, and Economic Growth," CEPR Discussion Papers 3467, C.E.P.R. Discussion Papers.
  11. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  12. repec:rus:hseeco:122439 is not listed on IDEAS
  13. Aghion, Philippe & Harris, Christopher & Vickers, John, 1997. "Competition and growth with step-by-step innovation: An example," European Economic Review, Elsevier, vol. 41(3-5), pages 771-782, April.
  14. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  15. Dollar, David & Kraay, Aart, 2001. "Trade, growth, and poverty," Policy Research Working Paper Series 2615, The World Bank.
  16. Esther Duflo, 2000. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," NBER Working Papers 7860, National Bureau of Economic Research, Inc.
  17. Petia Topalova, 2004. "Trade Liberalization and Firm Productivity; The Case of India," IMF Working Papers 04/28, International Monetary Fund.
  18. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
  19. Sivadasan Jagadeesh, 2009. "Barriers to Competition and Productivity: Evidence from India," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-66, September.
  20. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  21. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  22. F. Zilibotti & P. Aghion & R. Burgess, 2004. "The Unequal Effects of Trade Liberalization: Theory and Evidence from India," 2004 Meeting Papers 40, Society for Economic Dynamics.
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