Returns to Growth in Indian Automobile Industry: A Non-Parametric Data Envelopment Analysis (DEA) Approach

Abstract

This paper examines the concept of returns to growth (RTG) of Indian automobile industry by evaluating the relationship between growth of inputs and growth of outputs for estimating the RTG behavior of the major firms. RTG behaviour assumes importance for the Indian automobile industry which operates in a fiercely competitive oligopolistic market environment with clear evidences of price stickiness over last two decades. With increasingly stricter regulatory norms and rising costs of production, the automobile industry faces many challenges to sustain profitability. The firms need to innovate constantly and experience increasing returns to scale (RTS) to remain relevant. The empirical findings of the Indian automobile industry reveal that firms operating under increasing RTS may exhibit constant or decreasing RTG; firms showing constant RTS may exhibit increasing or decreasing RTG; and firms showing decreasing RTS may exhibit constant or increasing RTG. The paper finds that RTS estimates need not provide guidance to the growth strategy behavior of firms which operate under oligopolistic competition which compounds the challenges to remain profitable with a sticky price phenomenon.