Policy reforms evolution of domestic market structure and exports: a study of Indian engineering industry

Abstract

The policy reforms initiated in India since the eighties have caused entry of quite a few multinational firms into Indian industries. This has significant implications on the evolution of domestic market structure into a competitive one and consequent increase in exports. This paper builds a simple theoretical model in tracing out the evolution of domestic market structure by considering asymmetries in terms of time of entry and costs of production under oligopolistic competition. The main propositions of the model are empirically verified by econometric exercises based on firm level panel data for a set of industries. The results suggest a positive explanation of domestic market shares of firms by their relative technical efficiency in production. Increased competition from new entrants, especially multinational firms is driving domestic firms to undertake deliberate technological efforts for enhancing production efficiency. Research and development expenditures appear to be more important for domestic firms than multinational (which posses superior technology) in increasing technical efficiency in production. Increase in industry output, because of new entry and increased production efficiency of firms, appears to make firms to augment their export orientation.