Do Not Get Trapped into Crossing: Indian Firms and Foreign Markets

This paper examines the relationship between the exposure to foreign trade and productivity growth for a sample of Indian manufacturing firms. By testing a catching up model of productivity growth, it sheds some light on the nature of the relationship between the exposure to foreign competition and productivity growth. It finds a non linear relationship between firms’ export share and productivity gains. Productivity growth declines with the share of exports on total sales, up to a threshold ranging between 40 and 50 per cent and it increases thereafter. This result appears to be dominated by the behaviour of firms in traditional sectors like textile and clothing. In more technology intensive sectors, like pharmaceuticals, productivity gains also arise for smaller export shares. One likely explanation of this finding is that being successful in the export market for exporters of traditional products also requires investments in technological upgrading. These investments are less likely to be viable for marginal exporters. In fact, firms with a larger than 50 percent share of exports are also found to be more capital intensive and to use newer machinery than non exporters or marginal exporters. In contrast we find that human capital is not significantly different for different categories of firms.