Trade regimes and productivity: exploring the impact of tariff policy on firm level technology strategies

Abstract

The economic reforms initiated in 1991 were broadly based on the view that the strategy of state dominated industrialisation with high protective barriers was either a mistake of has outlived its usefulness. And this strategy should now be replaced by a more market oriented, open economy approach. However, there has been no consensus on the impact of economic liberalisation on total factor productivity in the Indian manufacturing sector. While the links between liberalisation and growth in total factor productivity at the aggregate level have been explored in the recent literature, the effect of liberalisation on firm level choices remains an under-explored area. It is important to analyse such linkage because it is only through such choices that changes in the firm level efficiency take place. The paper is an effort in this direction. It brings out empirically the complexity of strategic technology choices and the difficulties of analysing them. The analysis based on detailed firm-level data for the pre-reform period data clearly show that protectionism did not foster technological activity by Indian firms; in fact, it seems to have hampered technology related investments. Higher rates of protection discouraged firms from keeping abreast of recent technological developments through the making or purchasing of technology. It is argued that an in-depth analysis of the impact of trade on firm level choices and productivity in the pre-liberalisation phase may be useful both as a benchmark for evaluating the impact of trade liberalisation as well as for providing insights to fine tune the evolving policy instruments.