Productivity growth, protection and plant entry in a deregulating economy:The case of India

In this paper we study the comparative performance of Indian manufacturing industries during relatively recent periods of domestic regulation and de-r egulation of plant entry. The period of de-regulation is accompanied by lar gely unchanging levels of import competition and higher output growth. The growth of labour and total factor productivity (TFPG) is observed to be hig her during the deregulation period. We use data on 42 three-digit manufactu ring industries. Our sample covers consumer, intermediate and capital good industries. We study the relationship between levels of effective protectio n and total factor productivity growth (TFPG). We found that increasing eff ective rates of protection was not associated with lower TFPG. We test the hypothesis that higher degree of trade protection induces greater entry of plants. This hypothesis is statistically supported. Our econometric estimat es found a positive association between net entry and TFPG, after controlli ng for inter-industry differences in effective protection, asset size of pl ants and demand growth. Our results support the proposition that competitio n positively contributes to TFPG during deregulation.