Is Intra-industry Trade Gainful? Evidence from Manufacturing Industries of India

Considering a range of both static and dynamic indices to measure magnitude of intra-industry trade (IIT), this paper demonstrates that the liberalization process has led to increase in dominance of India’s trade in products of similar or different technologies. According to OECD classification of industries, we find major share of India’s IIT has evolved from industries of India that are categorized into high, medium-high and medium-low technology groups. Decomposing IIT of these industries into its varied forms, we find that India’s export of low technological products to be more dominant in India’s IIT than export of similar or high technological goods—indicating a downward trend in the terms of trade. Econometric estimates reveal that product differentiation representing consumer’s preference for range of varieties turn out to positively affect trade in both similar and different technologies of the same product. Furthermore, we also find increased competition from imports have resulted in the shift of specialization by industries of India from low technological products (yet dominant) to high and similar technological products. Our result also suggests that the magnitude of total IIT has gained impetus with the shift in productive resources from inefficient to efficient product lines within an industry. However, with disentangling total IIT one observes that much of the explanation behind the result is owed to dominance of India’s export of low technological product. Alongside, we also identify that protectionism in the form of anti-dumping initiations initiated by foreign firms allows them to leapfrog Indian firm’s export of superior technological variant.