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The impact of trade liberalization on productivity: Evidence from India's formal and informal manufacturing sectors

Shanthi Nataraj

Journal of International Economics, 2011, vol. 85, issue 2, 292-301

Abstract: Despite a large literature investigating the impacts of trade on firm productivity, there is almost no evidence on how small firms react to trade liberalization. Using a unique dataset of firm-level surveys that are representative of the entire Indian manufacturing industry, I show that India's unilateral reduction in final goods tariffs increased the average productivity of small, informal firms, which account for 80% of Indian manufacturing employment but have been excluded from previous studies. In contrast, the increase in productivity among larger, formal firms was driven primarily by the concurrent reduction in input tariffs. By examining the effect of the tariff liberalization on the distributions of productivity and firm size, I find evidence consistent with the exit of the smallest, least productive firms from the informal sector. In addition, I find that although the decline in final goods tariffs did not significantly impact average formal sector productivity, it did increase productivity among the top quantiles of the distribution.

Keywords: Trade liberalization; Firm productivity; Informal sector (search for similar items in EconPapers)
JEL-codes: F13 F14 L11 O17 O24 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:85:y:2011:i:2:p:292-301

DOI: 10.1016/j.jinteco.2011.07.003

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