Working Paper: CEPR ID: DP6881
Authors: Pinelopi Koujianou Goldberg; Amit Khandelwal; Nina Pavcnik; Petia Topalova
Abstract: Recent theoretical work predicts that an important margin of adjustment to deregulation or trade reforms is the reallocation of output within firms through changes in their product mix. Empirical work has accordingly shifted its focus towards multi-product firms and their product mix decisions. Existing studies have however focused exclusively on the U.S. Using detailed firm-level data from India, we provide the first evidence on the patterns of multi-product firm production in a large developing country during a period (1989-2003) that spans large-scale trade and other market reforms. We find that in the cross-section, multi-product firms in India look remarkably similar to their U.S. counterparts, confirming the predictions of recent theoretical models. The time-series patterns however exhibit important differences. In contrast to evidence from the U.S., product churning - particularly product rationalization - is far less common in India. We thus find little evidence of "creative destruction". We also find no link between declines in tariffs on final goods induced by Indian's 1991 trade reform and product dropping. The lack of product dropping is consistent with the role of industrial regulation in India, which, like in many other developing countries, may prevent an efficient allocation of resources.
Keywords: Creative destruction; Developing countries; India; Multiproduct firms; Product churning; Trade liberalization
JEL Codes: F12; F13; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| India's trade liberalization (F14) | multiproduct firms' product mix decisions (L21) |
| tariff reductions (F13) | product dropping (L81) |
| changes in product mix (L15) | increase in Indian manufacturing output (L60) |
| product additions (Y90) | changes in product mix (L15) |
| multiproduct status (L15) | firm size (L25) |
| multiproduct firms (L19) | productivity (O49) |
| multiproduct firms (L19) | likelihood to export (F10) |
| single-product firms (L19) | product churning (L15) |