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Trade liberalization and heterogeneous firms’ adjustments: evidence from India

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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.

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Notes

  1. See for instance Pavcnik (2002), Trefler (2004), Fernandes (2007), Schor (2004), Amiti and Konings (2007), Topalova and Khandelwal (2011), Bas and Ledezma (2010). Few exceptions deal with product scope (Goldberg et al. 2010).

  2. We complete the evidence on this with export shares.

  3. Next section provides a more detailed discussion on the theoretical literature.

  4. We do not test here the impact of credit constraints on firms’ export patterns. Evidence on the effect of access to external finance on export participation can be found in Greenaway et al. (2007), Berman and Héricourt (2010), Secchi et al. (2014, 2015).

  5. Section 3 describes the policy instruments applied by the Indian Government during this reform.

  6. Using effectively applied most-favorite-nation (MFN) tariffs data and input-output matrices, we construct input and capital goods tariffs as described in Sect. 4.2.

  7. These quantifications are based on our baseline regressions, Tables 6 and 8 below.

  8. This result contrasts with Pavcnik (2002)’s finding. The reason is that she assumes an increased schedule of trade liberalization over time. Bas and Ledezma (2010) compute specific trade-costs measures since tariffs where homogeneous and indeed rose (and did not declined) during most of the period under analysis in Pavcnik (2002).

  9. Similar positive relationships between input tariffs and other firm-level performances have been observed. Goldberg et al. (2010) documents that input-tariff reductions in India are also associated with an expansion of the number of domestic products. Other studies also show that input-liberalization enhance export performance (Bas 2012).

  10. Using plant level data from Mexico, Kandilov and Leblebicioglu (2012) find that final goods tariffs cuts reduce firms’ investments.

  11. The objectives of the ‘Ninth Plan’ are explained in detail in the Web site from the Planning Commission of the Government of India: http://planningcommission.nic.in/.

  12. During the first wave of trade liberalization (1989–1997), the number of firms in the Prowess dataset in the manufacturing sector raise from around 1100 in 1989 to 2500 in 1997, while during the second reform (1997–2006) the number of firms ranges from 2500 in 1997 to 2749 in 2006.

  13. The CMIE is an independent economic center of India. For more information see: http://www.cmie.com/database.

  14. This dataset has been already used in several studies on the productivity of Indian firms during the first wave of liberalization. See Topalova and Khandelwal (2011), Topalova (2004), Goldberg et al. (2010), Goldberg et al. (2009), Bas and Berthou (2012), Alfaro and Chari (2009) and DeLoecker et al. (2016).

  15. This financial ratio is used by several works studying the impact of access to external finance on export participation (Greenaway et al. 2007; Berman and Héricourt 2010) and on the decision to import capital goods (Bas and Berthou 2012).

  16. We use correspondence tables to convert tariffs into ISIC rev 3.1. that match almost perfectly with NIC classification. This dataset is available at http://wits.worldbank.org/wits/.

  17. Capital goods industries are tractors and agriculture machinery, industrial machinery, industrial machinery (others), office computing machines, other non-electrical machinery, electrical industrial machinery, communication equipments, other electrical machinery, electronic equipments, ships and boats, rail equipments, motor vehicles motor cycles and other transport equipments.

  18. See Sect. 2 for a more detailed theoretical discussion.

  19. The total effect of output tariff reductions for firms that export during the whole period is the sum of coefficient of output tariffs and the interaction term.

  20. We thank an anonymous referee for suggesting investigating this channel.

  21. We thank an anonymous referee for suggesting investigating this channel.

  22. Unfortunately, the Prowess dataset does not report information on different skills.

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Author information

Authors and Affiliations

  1. Centre d’Economie de la Sorbonne, University of Paris 1, Paris, France

    Maria Bas

  2. Laboratoire d’Économie de Dijon (LEDi), Université de Bourgogne - Franche-Comté, Dijon, France

    Ivan Ledezma

Authors
  1. Maria Bas
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  2. Ivan Ledezma
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Correspondence to Maria Bas.

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We have benefited from discussions with Marius Brulhart, Mathieu Crozet, Swati Dhingra, Lionel Fontagne, Philippe Martin, Thierry Mayer, Cristina Terra and Thierry Verdier.

Appendix

Appendix

See Tables 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17.

Table 1 Number of observations per year
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Table 2 Summary statistics
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Table 3 Summary statistics by export status in 1998–2006
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Table 4 Summary statistics on tariff measures
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Table 5 Tariff reductions between 1998 and 2006 and pre-reform industrial characteristics in 1998
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Table 6 Tariff exogeneity, industry characteristics and future measures of trade protection
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Table 7 Trade liberalization and domestic sales
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Table 8 Trade liberalization and export shares
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Table 9 Trade liberalization and capital used
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Table 10 Heterogeneous effects of trade liberalization by export status
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Table 11 Heterogeneous effects of trade liberalization by export and import status: two-way traders, only exporters and only importers
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Table 12 Heterogeneous effects of trade liberalization by ownership status
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Table 13 Trade liberalization, credit constraints and capital accumulation
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Table 14 Trade liberalization, credit constraints and domestic sales
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Table 15 Trade liberalization and other firms’ outcomes
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Table 16 Winners versus losers
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Table 17 Quantification of the gains from trade liberalization in India for winners relative to losers
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Bas, M., Ledezma, I. Trade liberalization and heterogeneous firms’ adjustments: evidence from India. Rev World Econ 156, 407–441 (2020). https://doi.org/10.1007/s10290-019-00366-x

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