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

rate of productivity growth in the post-trade liberalization period. Further, they find a slight
increase (rather than a reduction) in returns to scale after the trade reform, although the returns
to scale estimated by these authors for the pre-reform period are much lower than those estimated
by Krishna and Mitra (1998). Indeed, Balakrishnan et al. (2000) find evidence of decreasing
returns to scale, whereas Krishna and Mitra (1998) find evidence of strong increasing returns to
scale in all sectors except Electrical machinery.

Given the substantial overlap between the time periods and industries covered by the data used
in the two studies, the striking differences in the results are likely to be caused by differences in
the methodology used to measure factor inputs and in the econometric strategy. In particular,
Balakrishnan et al. (2000) use the fixed-effects estimator, use instrumental variables to control for
the endogeneity of factor inputs and pool together firms belonging to different sectors. In contrast,
Krishna and Mitra (1998) use the random-effects estimator, do not control for the endogeneity of
inputs and perform separate regressions for each sector.

Finally, notice that, similar to Balakrishnan et al. (2000), other works find a reduction in the
rate of productivity growth of Indian firms in the post-liberalization period. Srivastava (2000) uses
data for about 3000 Indian companies for the period 1980 to 1997. He finds a decline in the rate
of productivity growth in the 1990s as compared to the 1980s. Kumari (2000) uses firm level data
relative to engineering industries (electrical and non-electrical groups) for the period 1985 to 1995.
She finds that productivity growth of engineering firms has declined in the post-reform period as
compared to the pre-reform period.

To sum up, contrary to other trade liberalizing developing countries, the available micro-level
evidence does not allow yet to discern the effects of the 1991 trade reform in India on firms’ mark-
ups, on the degree of exploitation of returns to scale and on productivity growth. Aside from
methodological issues (see section 3.2), one possible explanation for this lack of positive results
is that India is still a highly regulated economy, and hence the expected beneficial effects of the
trade-induced reallocation of resources will take longer to materialize.

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