Manoj Pant

Measuring market imperfection in the manufacturing sector: Theory and evidence from India

Abstract In this paper we have looked at the structure of competition in the Indian corporate sector during 1989 – 2003 and found that the new industrial policy has not been able to foster greater competitiveness in organized industries. In spite of an increase of in the number of firms, the industry has not become more competitive in terms of the difference between price and marginal cost. The firms that have entered are small players in the market and no significant entry of middle-sized firms has taken place. In order to deal with the ‘missing middle’ aspect of industrial concentration in India, we have used a leadership model to estimate the mark-ups for groups of small and large firms. The theoretical model suggests that sample classification is necessary in order avoid bias in mark-up estimates. The sub-game perfect equilibrium in the leadership model also suggests that the mark-up of small firms is different from that of the large firms and possibly higher under certain conditions, which is partly supported by the econometric finding in the Indian context.

Incentives for Attracting FDI in South Asia

Incentive offers along with performance requirements are a notable feature of the Foreign Direct Investment (FDI) policies of South Asian countries after they opened up to trade and investment in the 1990s. Since FDI operates in an imperfect market environment, a government policy that tries to counter this imperfection by insisting on performance requirements could well improve welfare. Incentives are then offered to soften the impact of performance requirements. There are no systematic studies to assess the cost and benefits of these incentives offered competitively in South Asian countries. Often, the purpose of these incentives may have been to generate funds for side payments to the bureaucracy of host countries. Incentives seem to affect mainly footloose FDI or, at best, lead to relocation of FDI within a region. This latter advantage disappears when countries of a region tend to compete in incentives. The limited number of studies on the South Asian region that are available seem to identify an increase in employment and/or wages, reduced prices or improved product quality, more revenues for the government and indirect benefits through professionalism, learning and technology diffusion as benefits. The impact of providing facilitation to foreign investors on national savings, deterioration in trade conditions and balance of payments are cited as the cost of incentives. Coordination in FDI policy making among South Asian countries is the main policy prescription that emerges out of this study.

Corporate Governance, Competition and Firm Performance

The objective of this article is to disentangle the combined effect of product market competition and corporate governance variables on firm performance. While the linkage between internal governance mechanism and firm performance is well established in several studies, the interaction between internal and external governance mechanism has received scanty attention in emerging market economies. Here we have shown the independent and interaction effect of ownership and competition variables on firm productivity. Contrary to conventional wisdom, we document that competition has in reality become a discernible force in developing economies. The econometric modelling result shows that while the stand-alone effect of ownership variable on productivity is mostly insignificant, there is a strong positive interaction effect with competition variables.

Financial Intermediation and Employment

In our model, there are entrepreneurs and other agents. The latter have labour and capital, but no entrepreneurship. They are employed for a wage, or they are self-employed (which is inefficient). If they are employed for a wage, they invest their capital in financial assets. Otherwise, they take up self-employment, which requires capital and leaves little scope for buying financial assets. It can then be shown that investment in financial assets and wage employment are positively correlated. The model helps explain why a small financial system and low wage employment are observed in less developed countries that have high cost of financial intermediation.

Firm Capabilities and Productivity Spillovers from FDI: Evidence from Indian Manufacturing Firms

Using a panel dataset on Indian manufacturing firms from 1994 to 2010, the present paper examines the productivity spillovers from the foreign direct investment (FDI) through various channels of horizontal and vertical linkages. In addition, the study also focuses on the influence of domestic firms’ initial capabilities in absorbing FDI-induced technological benefits. Firm productivity has been measured by using the semi-parametric Levinsohn–Petrin methodology. Using the fixed-effect panel model to estimate spillover models, the initial results show that the productivity growth of Indian firms is adversely affected by various horizontal spillover channels, while the vertical linkages are found insignificant. Interestingly, the second part of the study reveals that only the domestic firms with some initial technological capabilities (proxied by initial three years’ R&D activities), low technology gap with the foreign firms in the initial periods and high complementary capabilities (proxied by initial three years’ average firm size) gain productivity benefits from FDI spillover channels as compared to other firms within the industry. Essentially, the study brings out the importance of domestic firms’ need to encourage internal R&D activities in absorbing technological benefits from foreign presence and their economic activities in the domestic market.

India–Pakistan Trade: An Analysis of the Pharmaceutical Sector

With the ongoing trade normalisation process between India and Pakistan, opportunities to integrate have opened up between both countries. The pharmaceutical sector is crucial to health issues in developing economies and would be an ideal segment to focus on in improving trade relations between the two countries. Here, an empirical and theoretical analysis of India–Pakistan trade using some statistical indicators reveals low levels of current trade but huge trade potential. Since China has virtually dominated the trade scene in nearly all manufacturing sectors, this study also looks at the tripartite dynamics of trade in pharmaceutical items among India, Pakistan and China. An analysis of the China–Pakistan and the South Asia Free Trade Area Agreements reveals that while Pakistan does not give any favourable treatment to China in items on Pakistan’s negative/sensitive list for India, there is some indication that the favourable tariff treatment to China in general may have affected India’s low trade in pharmaceutical products with Pakistan. The study further argues that the opening up of the Pakistan pharmaceutical market to India would lead to an increase in consumer surplus, given the advantages of competition. Since many items are already imported from China, the argument that India’s imports would stifle domestic producers seems misplaced. Hence, non-discriminatory access to Indian products seems reasonable. A positive start could be the phasing out of Pakistan’s negative list. The incorporation of trigger mechanisms would help appease the apprehensions of the pharmaceutical industry in Pakistan about an influx of pharmaceutical items from India. Discussions with some major Pakistan pharmaceutical producers indicated that normalising trade would also provide external economies in areas like R&D and standards. In some areas, the benefits could flow to Indian producers. In this context, it seems necessary to establish a process for establishing mutual recognition agreements (MRAs), which would improve product quality in both countries. Finally, since FDI is just another way of doing trade, it seems necessary to explore the possibilities here at least to boost future trade prospects. Some harmonisation of FDI policies may be warranted.

Regional Trading Arrangements and Developing Countries: Understanding the Phenomena

One of the remarkable features of international trade has been the explosion of regional trading arrangements (RTAs) especially after 1990. In particular, developing countries have been in the forefront in contracting RTAs, especially among themselves. The period after 1995 is also characterized by the growth of trade among developing countries while their trade with developed countries has been on the decline. It seems that the latter phenomenon is driven by RTAs. India too has been very active in recent years in contracting RTAs. This article argues that the causality seems to be from trade to RTAs rather than the other way round. It is seen that conventional gains from RTAs via tariff reduction do not show up in empirical work. RTAs thus do not lead to increased trade among countries and are, in fact, a de facto rationalization of growing trade relations between countries. It is argued further that the growth in RTAs is explained more by developments in international politics and the emergence of a multi-polar world rather than by the conventional calculus of economic theory.