Trade Liberalization and Firm Productivity: The Case of India (original) (raw)

2011, Review of Economics and Statistics

Using a panel of firm-level data, this paper examines the effects of India's trade reforms in the early 1990s on firm productivity in the manufacturing sector, focusing on the interaction between this policy shock and industry, firm and environment characteristics. The rapid and comprehensive tariff reductions-part of an IMF-supported adjustment program with India in 1991-allow us to establish a causal link between inter-industry and inter-temporal variations in output tariffs, input tariffs, and effective rates of protection and consistently estimated firm productivity. Specifically, reductions in trade protectionism led to higher levels of firm productivity, with this effect strongest in industries that were import-competiting and were not subject to excessive domestic regulation. A significant productivity boost was generated by the lower tariffs on intermediate inputs as well. Interestingly, state-level characteristics, such as labor regulations, investment climate, and financial development, do not appear to influence the effect of trade liberalization on firm productivity. Finally there is strong suggestive evidence of complementarities between trade liberalization and industrial policies that encourage domestic competition.