Working Paper: NBER ID: w14127
Authors: Pinelopi K. 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 India'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: multiproduct firms; product turnover; trade liberalization; India
JEL Codes: F13; F14; L1; L6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in firms' product mix (L21) | trade policy (F13) |
| tariff declines (F14) | firms' extensive margins (D21) |
| regulatory constraints (L51) | firms' ability to adjust product lines (D21) |
| high sunk costs (G31) | lack of product shedding (L15) |
| product additions (Y90) | absence of product dropping (C69) |
| multiproduct firms in India (L65) | larger size (F12) |
| multiproduct firms in India (L65) | higher productivity (O49) |
| multiproduct firms in India (L65) | greater likelihood of exporting (F10) |
| product churning (L15) | lack of creative destruction (O39) |
| output tariffs (F19) | number of products manufactured by firms (L60) |