How Do Domestic and Foreign Firms Respond to a Reduction in Competition from the Public Sector? Evidence from Vaccine Markets in India

Abstract

This study examines how domestic and foreign firms in the private sector respond to a reduction in competition from the public sector. Our analysis exploits the sudden suspension of production licenses of vaccine-manufacturing public sector units (PSUs) in January 2008 in India, home to more than 1.2 billion people at that time. Although the suspension presented a window of opportunity for private sector firms, the opportunity was laden with high uncertainty. Despite this uncertainty, we find that the suspension was associated with revenue gains driven by new product introductions and that these gains persist even after the supply suspension revocation in February 2010. Importantly, unlike domestic firms, foreign firms gain little. We explore potential mechanisms and find evidence consistent with one of them being the major reason for the differing impact: Domestic firms better navigate the challenges arising from political pluralism, an institutional feature characterized by a lack of political alignment between national and subnational governments. In the presence of political alignment, domestic firms do not have a comparative advantage over foreign firms. Our evidence thus highlights that even an uncertain and transitory window of opportunity arising from a controversial reduction in competition from the public sector can lead to a fundamental market restructuring in ways that can diverge from the intended policy objective. In particular, domestic firms' ability to manage political pluralism is a core mechanism explaining their comparative advantage over foreign firms in the wake of a national crisis.

Keywords: competition, nonmarket strategy, domestic firms, foreign firms, political alignment