Barriers to Competition and Productivity: Evidence from India

A number of economic theories suggest that barriers to competition lead to higher levels of inefficiency among incumbents in an industry. In this paper, we use a detailed plant-level dataset to study the the impact on productivity of two reforms aimed at increasing product market competition in India – liberalization of foreign direct investment (FDI) and reduction in tariff rates – initiated in 1991. First, we examine the effect of the liberalization policies on mean plant-level productivity in the liberalized industries. While we find no significant effects in the short-run (1992-93), we find significant increases in productivity level in the FDI and tariff liberalized relative to non-liberalized industries in the longer term (1993-94). We check and find our results robust to a range of robustness tests. Next, we examine the role of intensive (within-plant productivity growth) and extensive (reallocation from less to more productive plants) margins in the post reform productivity increases, and find a predominant role for the former. Finally we assess potential channels for within-firm productivity improvement. Consistent with a role for price competition, we find evidence of relatively greater output price declines in the liberalized sectors