DP8011 Services Reform and Manufacturing Performance: Evidence from India

Author(s): Jens Arnold , Beata Javorcik , Molly Lipscomb , Aaditya Mattoo

Publication Date: September 2010

Keyword(s): foreign direct investment , liberalization , productivity , services reform

JEL(s): D24 , F2 , L8

Programme Areas: International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP8011.asp.asp

Conventional explanations for the post-1991 growth of India’s manufacturing sector focus on goods trade liberalization and industrial de-licensing. We demonstrate the powerful contribution of a neglected factor: India’s policy reforms in services. The link between these reforms and the productivity of manufacturing firms is examined using panel data for about 4,000 Indian firms for the period 1993-2005. We find that banking, telecommunications, insurance and transport reforms all had significant positive effects on the productivity of manufacturing firms. Services reforms benefited both foreign and locally-owned manufacturing firms, but the effects on foreign firms tended to be stronger. A one-standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises.