Monthly Seminar Series | Global Value Chains and Total Factor Productivity in Indian Manufacturing Firms

Jun 5, 2021
Zoom
#Trade and FDI

Abstract

Recent government policies of “Aatmanirbhar Bharat Abhiyaan” and “vocal for local” are clearing advocating an inward domestic shift in Indian manufacturing, further accelerated due to disruptions in GVCs during the Covid-19 pandemic. This paper argues that India needs to re-orient its trade policies with emphasis on linking and upgrading in GVCs, which can enable the economy to achieve a strong recovery through firm-level productivity gains. In this paper, empirical analysis is conducted to identify the impact of GVC integration on total factor productivity in Indian manufacturing firms. An unbalanced panel of Indian manufacturing firms is constructed from the firm-level dataset PROWESS for the period 2000/2001-2014/2015. The Levinsohn-Petrin methodology is used to estimate TFP, complemented with a novel method to estimate capital-stock. For empirical analysis, a two-step strategy is used to address the issues of self-selection and enodoegenity. GVC firms are first matched with similar non-GVC firms using Propensity Score Matching, and then on this matched sample, the System GMM estimator is deployed to address issues of endogeneity. A number of robustness checks are carried out to ensure that the results obtained are robust to different specifications, measurement issues and methodologies. Results indicate that even after accounting for self-selection, Indian GVC manufacturing firms are more productive than one-way traders and domestic firms, and increasing levels of GVC embeddedness further boosts firm-level TFP. But the type of linkages matter; GVC firms that link into relational governance chains, captured through share of skilled workers and ICT index relative to industry, are found to have significantly higher productivity growth than firms in captive or hierarchical chains. Relational suppliers enter into power-symmetrical relationships with lead firms, characterised by mutual dependence, trust and stability, which enhance productivity growth. A positive and significant impact is found for firm age and and a negative impact for firm leverage.

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