Differential effects of trade openness on Indian manufacturing firms

Abstract

We examine the performance of different types of Indian manufacturing firms for the 1999–2004 and the 2004–09 periods, before and after significant trade liberalization took place under the Export-Import (EXIM) policy of 2004–09. Based on firm-level balanced panel data from the Centre for Monitoring Indian Economy (CMIE) Prowess database, we assess the differential impact of this policy on the performance of food and agro-based versus non-food and non-agro based firms as well as on large versus small firms, while controlling for firm and industry-specific characteristics. By using a semi-parametric Difference-in-Difference model we find that the EXIM policy had a positive effect on firm-level productivity and profitability in the case of non-food and non-agro based firms which experienced significant trade liberalization while food and agro-based firms, which remained relatively protected, exhibited stagnant and weak performance. We also find that trade liberalization mainly benefited large as opposed to Small and Medium sized firms. We conclude that continued trade protection has hurt certain Indian manufacturing industries and that alongside trade liberalization, complementary policies that address structural and other constraints faced by certain groups of firms, also need to be implemented.