Competition, Openness and Inequality of Firm Size in the Indian Manufacturing
| Author | Hariprasad Govinda |
| DOI | 10.1177/0015732515616546 |
| Published date | 01 February 2016 |
| Date | 01 February 2016 |
| Subject Matter | Articles |
Competition, Openness
and Inequality of
Firm Size in the
Indian Manufacturing
Hariprasad Govinda1
Abstract
This article is an attempt to study the impacts of trade openness and competi-
tion on inequality of firm size in the Indian manufacturing during 1990–2010. A
number of empirical studies have observed a positive skewness in the size distri-
bution of firms (log-normal distribution) and an increasing concern over raising
inequality of firm sizes in the industry.
I have attempted to study the direction of the causation between export open-
ness and inequality of firm size distribution (FSD), which is not often studied so
far, despite it being purely empirical. The empirical results clearly show that
export openness is statistically significant (1 per cent) throughout all the models
and has negative effects on inequality. This is one interesting and robust empirical
finding that export openness has the capability to reduce inter-firm performance
differences, and hence, reducing inequality in FSD.
JEL: L11, C23, C33, F14, L6
Keywords
Firm size distribution, openness, skewness, kurtosis, panel regression
Introduction
This article is an attempt to study the impacts of trade openness and competition
on inequality of firm size in the Indian manufacturing during 1990–2010. The
period of my study has witnessed certain historical discontinuities which have a
direct bearing on the relevance of the study. First, India has graduated from an
Foreign Trade Review
51(1) 81–97
©2016 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732515616546
http://ftr.sagepub.com
Corresponding author:
Hariprasad Govinda, Senior Economist, Policy & Research, Competition Commission, 2nd Floor,
Mulayo Building (Block C), The DTI Campus, South Africa.
E-mails: HariprasadG@compcom.co.za; harieco@gmail.com
1 Senior Economist, Policy & Research, Competition Commission, South Africa.
Article
82 Foreign Trade Review 51(1)
essentially closed and controlled economy to a somewhat liberalized economic
system through a series of economic policy reforms initiated by the industrial
reform policy in 1991. While during the pre-1991 period, license raj system pro-
vided the entry barriers; after the initiation of the industrial policy reforms, the
firms enjoyed the freedom to enter the industry. Second, by 1995, India had
become a signatory of the World Trade Organization (WTO) by which the country
had abandoned its earlier protective policies and adopted trade liberalization poli-
cies following reduction of tariffs and non–tariff barriers. Thus, a study has
become relevant to evaluate the effects of policy changes.
In this article, an attempt has been made to study the size distribution pattern
of the Indian manufacturing over the sample period. A number of empirical stud-
ies have observed a positive skewness in the size distribution of firms (log-
normal distribution) and an increasing concern over raising inequality of firm
sizes in the industry (Balakrishnan & Babu, 2003; Baldwin & Gorecki, 1991;
Bloch, 1981; Cabral & Mata, 2003; Coad, 2008; Hymer & Pashigian, 1962;
Pagano & Schivardi, 2003; Simon, 1964). Das and Pant (2006) have empirically
observed that mid-size firms have been disappearing in the Indian manufacturing.
This has resulted in a skewed distribution of firms’ sizes in terms of coexistence
of a very few large firms and a large number of very small firms.1 Reasons could
be: one, either takeover by larger firms or loss of market share; two, high density
of entry in the lower segment of the product space such as spares and ancillaries
mainly by small enterprises; three, free entry has led to the entry of more ineffi-
cient firms into the industry;2 four, trade openness is contributing to the firms’
size distribution by impacting existing firms’ (both exporting and non-exporting)
productivities and efficiencies (Melitz, 2003). Further, Agarwal and Barua (1994)
also show that in an open economy oligopoly model, larger firms tend to export
more, and the same has been empirically tested and confirmed by Barua,
Chakraborty and Govinda (2012).3
Export Openness and Firm Size Distribution
The research of firm size distribution (FSD) originated from Viner (1932). It
shows that the equilibrium FSD in an industry is unique, at which industrial total
cost is minimized, if the long-term industrial average cost curve is of ‘U’ shape.
This implies that FSD reflects the efficiency of industrial resource allocations.
Recently, several researchers have investigated the relationship between trade
and FSD. Nocke and Yeaple (2008) examined the influences of trade liberaliza-
tion on the distribution of multi-product firms’ domestic sales. In their points of
view, trade liberalization affects FSDs through two channels:
1. Resulting in reallocation of properties of products across firms.
2. Toughening competition among firms, which magnifies the cost-difference
effect so that the losses of sales of high-cost firms are larger than those of
low-cost ones.
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