Our main finding is that firms that are in contact with developed countries do not exhibit
a productivity advantage while firms that concentrate export and import activities
towards a specific area (both developed and developing) are more productive.
Regarding the performance of Indian firms with respect to trade, previous papers have
found mixed results. Topalova (2004), for the period 1989-2001, shows a positive
correlation between firm level productivity and the lowering of trade restrictions, in line
with Krishna and Mitra (1998) results. But besides Driffield and Kambhampati (2003),
also Parameswarn (2000), for a sample of 640 firms between 1989 and 1998, finds that
trade liberalization has had a negative effect on technical efficiency. For this, India
remains an interesting case study. Indian trade policy went trough a series of complex
reforms that started in the early 80s. Until 1982-83 Indian trade regime was
characterized by numerous quantitative restrictions. Then, in those years, the first step
towards liberalization lifted many restrictions on imports of intermediate inputs and
capital goods to promote technological upgrading and modernization of the Indian
industry. Then in the 1990s, following a balance of payment crisis, the continued reform
process showed a consistent commitment of the country towards trade liberalization. The
removal of quantitative restrictions on imports was accompanied by a gradual lowering
of customs duties in each of the budgets presented from 1991 onwards. However, even if
there is a wide recognition that the import-substitution industrial policy has been shifted
in favour of more liberalized import and export policies (Hasan et al 2003), the
protection level for Indian manufacturing at the end of the various phases of trade
liberalization still remains high (Das, 2003)3. Furthermore, the resource reallocation
following these policies did not necessarily generate, at the firm level, all the expected
efficiency gains. On the other side, the country still maintains a consistent domestic
market therefore domestic firms are not necessarily obliged to rely on foreign markets to
exploit, for example, scale economies. Therefore the combined analysis of import and
export intensities can also have important trade policy implications.
3 From his quantification of Indian trade barriers Das (2003) finds for 2001 an average estimates for the
“effective rate of protection” of 40 percent that it is very high if compared with the post reforms protection
levels (average tariff rates of manufactures) of other developing countries: Indonesia (1999- 10.7%),
Malaysia (1997- 7.5%) and Sri Lanka (1997- 19 %).