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Tariff liberalization and firm-level markups in Indian manufacturing

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  • Mukherjee, Subhadip
  • Chanda, Rupa

Abstract

Tariff liberalization has a significant bearing on firm performance. Existing theoretical studies predict that input tariff liberalization would raise firm-level markups while final goods tariff liberalization would lower markups. This paper examines whether this two-sided effect holds for Indian manufacturing firms and the role of size and classification. It employs fixed effects models and Heckman's two-step estimation procedure to estimate the impact of input and final goods tariff liberalization under India's Export-Import Policy of 1997–2003 and 2004-09 for large versus Micro, Small and Medium Enterprise (MSME) firms. It confirms the two-sided effect and finds that the input channel is stronger, with large rather than MSME firms experiencing higher markups following input tariff reduction. Further, using a semiparametric Difference-in-Difference model it finds that relaxed size limits in 2006 resulted in higher markups for importing MSMEs. This study highlights the importance of firm size, liberalization channel, and policy framework for firm-level markups.

Suggested Citation

  • Mukherjee, Subhadip & Chanda, Rupa, 2021. "Tariff liberalization and firm-level markups in Indian manufacturing," Economic Modelling, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321001838
    DOI: 10.1016/j.econmod.2021.105594
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    3. Gnangnon, Sèna Kimm, 2021. "WTO membership, the membership duration and the utilization of non-reciprocal trade preferences offered by the QUAD Countries," EconStor Preprints 247265, ZBW - Leibniz Information Centre for Economics.
    4. Gnangnon, Sèna Kimm, 2023. "Duration of membership in the world trade organization and investment-oriented remittances inflows," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 258-277.
    5. Sun, Churen & Wu, Han, 2023. "The impact of export VAT rebate on firm-product markups: Evidence from Chinese industrial enterprises," Economic Modelling, Elsevier, vol. 119(C).
    6. Gnangnon, Sèna Kimm, 2022. "Duration of WTO Membership and Investment-Oriented Remittances Flows," EconStor Preprints 251274, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Manufacturing; Small scale industry; Total factor productivity; Markup; Trade reform;
    All these keywords.

    JEL classification:

    • L6 - Industrial Organization - - Industry Studies: Manufacturing
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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