Learning Versus Stealing: How Important are Market-Share Reallocations to India’s Productivity Growth

Abstract

The new trade theory emphasizes the role of market-share reallocations across firms (“stealing”) in driving productivity growth, while the older literature focused on average productivity improvements (“learning”). The authors use comprehensive, firm-level data from India’s organized manufacturing sector to show that market-share reallocations did play an important role in aggregate productivity gains immediately following the start of India’s trade reforms in 1991. However, aggregate productivity gains during the overall 20-year period from 1985 to 2004 were driven largely by improvements in average productivity. By exploiting the variation in reforms across industries, they document that the average productivity increases can be attributed to India’s trade liberalization and FDI reforms. Finally, they construct a panel dataset that allows them to track firms during this time period; their results suggest that while within-firm productivity improvements were important, much of the increase in average productivity also occurred because of firm entry and exit.

JEL Classification: F13, F14, F23