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

7.6 Trade liberalization in India: greater uncertainty versus a richer
menu of opportunities ?

In Section 6, we have shown that a trade-induced increase in product demand elasticities should
also bring about an increase in the derived labor demand elasticities. As shown by Rodrik (1997),
this implies that workers exposed to international competition should face a higher volatility of
wages and employment in response to exogenous shocks to labor demand. Daveri, Manasse and
Serra (2002) argue that trade-induced increases in the volatility of factor prices and employment
are only part of the story, since firms and workers exposed to international competition may also
have a greater incentive to invest in productivity enhancing activities, such as training and effort,
in order to hedge the risk of lower incomes. The aim of the authors is hence to test the empirical
relevance, in the case of India, of what they call “the twin effects of globalization”, i.e., higher
uncertainty versus a richer menu of opportunities for firms and workers involved in international
competition.

The data used by the authors come from a survey of 895 Indian firms belonging to five manu-
facturing sectors: Garments, Textiles, Pharmaceuticals, Electronic consumer goods and Electrical
white goods. The data, which cover the period 1997-1999, have recently been collected by the
World Bank. In order to test their hypotheses, the authors partition firms into the following three
groups. Firms exporting at least 30% of their output are defined as Exporters (they represent 37%
of the total), non-exporting firms declaring to face foreign competition in their domestic market
are defined as Import-Competing firms (27% of the total), and the rest of the firms belong to the
group of Protected firms (36% of the total). Note that firms belonging to the former two groups
are directly exposed to international competition and hence, by comparing their evolution to that
of protected firms, we can infer something about the pros and cons of globalization. Consider un-
certainty first. Let wit = μi + υi_t represent a variable pertaining to firm i at time t (i.e., the wage
rate, profits, sales, employment or prices), where μi and υi_t are is its permanent and transitory
components. The variance of wit can then be written as the sum of σ²_μ + σU, where the former

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