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



intensity is positively and significantly correlated with technology imports, outward orientation and
capital goods imports. However, when performing separate regressions for local firms and MNE
affiliates, it turns out that, in contrast to local firms, MNE affiliates’ R&D effort is not correlated
with export intensity and capital goods import intensity. MNE affiliates’ R&D intensity is instead
positively correlated with their profitability, as measured by the price-cost margin. According to
the authors, one possible explanation for these findings is that local firms direct their R&D activity
toward absorption of imported technology and outward expansion. In contrast, given their captive
access to the laboratories of their parents and associated companies, MNE affiliates’ R&D effort is
primarily directed toward customization of their parents’ technology for the local market in those
activities that are more profitable.

7.5 Employment effects of trade reform in Indian manufacturing

According to the traditional trade theory, trade liberalization expands the (comparative advan-
tage) exporting sector at the expense of the (comparative disadvantage) import competing sector.
However, this trade-induced sectoral reallocation of resources has no effect on aggregate employ-
ment, because of the assumption of factor market clearing. In practice, in the presence of frictions
in the labor market and of a sluggish intersectoral mobility of resources, a drastic trade liberaliza-
tion, such as the one experienced by India in recent years, can reduce employment in the import
competing sector and thus raise the short-run rate of unemployment. Indeed, fear of increased
unemployment in the import competing sector has often been the main reason against trade lib-
eralization in developing countries pursuing a development strategy based on import substitution.
However, as noted by Harrison and Revenga (1994), contrary to the predictions of the standard
trade theory, most empirical studies find only a modest effect of trade liberalization in developing
countries on the employment level in import competing sectors.
27

Kambhampati et al. (1997) examine the effects of the 1991 trade reform in India on employment

27See, for instance, Rama (1994) on Uruguay, Revenga (1994) on Mexico, Currie and Harrison (1994) on Morocco.
See also Harrison and Hanson (1999) on Mexico and Morocco.

48



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