Trade Liberalization, Firm Performance and Labour Market Outcomes in the Developing World: What Can We Learn from Micro-LevelData?



on the performance of Indian manufacturing firms and labor markets.

7.2 Trade liberalization and firm performance in Indian manufacturing

Two recent studies, Krishna and Mitra (1998) and Balakrishnan et al. (2000), provide an attempt
at a rigorous test of the effects of trade liberalization on firm performance in Indian manufacturing.
Both studies use firm-level data obtained from the Center for Monitoring Indian Economy (CMIE).
In both papers, the empirical analysis draws on the methodology developed by Hall (1988) and
Harrison (1994), which allows to examine the effects of the 1991 trade liberalization on firms’
mark-ups, productivity growth and the degree of exploitation of returns to scale. Notwithstanding
these similarities, the two papers reach completely different conclusions.

The data used by Krishna and Mitra (1998) spans the years 1986-1993 and cover the following
manufacturing industries: Electronics, Electrical machinery, Non-electrical machinery and Trans-
port equipment. The authors find that in all industries except Electrical machinery there were
reductions in returns to scale after 1991. This reduction in returns to scale may reflect an in-
creased exploitation of returns to scale by firms operating at too small a scale prior to the reform.
Krishna and Mitra also find evidence of significant reductions in mark-ups in the same industries
in the years following the reform.
26 Finally, they find evidence of increases in the growth rate of
productivity (ranging from 3 to 6%) in all industries except Transport equipment. This evidence
suggests that the 1991 trade liberalization in India was associated with a strong pro-competitive
effect leading to falling mark-ups, to an increased exploitation of scale economies and an increased
growth rate of total factor productivity. Notice that these effects are in line with the predictions
of the simple model illustrated in Section 2.

The data used by Balakrishnan et al. (2000) span the years 1988 to 1998 and cover the
following manufacturing industries: Machinery, Transport equipment, Textiles, Textile products
and Chemicals. In contrast to Krishna and Mitra (1998), these authors find a 1% fall in the annual
26For Electrical machinery, Krishna and Mitra find a slight increase in the mark-up. They argue, however, that
mark-up estimates for this industry are little reliable.

44



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