Chinese Competition and Product Variety of Indian Firms

Using detailed firm-product-year data across manufacturing industries in India, and exploiting the exogenous nature of China's entry into the WTO in 2001, we investigate the link between the impact of import penetration from China on the product variety of Indian manufacturing firms. We find: (i) robust and significant effect of product drop, with the effect coming only from competitive pressure in the domestic market; (ii) evidence of product drop or 'creative destruction' is robust only for the lower-half of the size distribution; (iii) firms drop their peripheral/marginal products and concentrate on the core ones; and (iv) our result is most strong for firms producing intermediate goods. For an average Indian manufacturing firm, 10 percentage point increase in India's Chinese share of imports in the domestic market reduces the product scope of firms by 1.7-4.4%. In contrast, we find positive effects on product scope as when firms are importing intermediate goods. We also find evidence of significant productivity effects and within-firm factor reallocation. Our results are consistent to a battery of robustness checks and IV estimation.