Internal policy reforms and evolution of market structure: a study of indian industry

Abstract

The recent market reforms in developing economies have led to increasing presence of multinational firms which has significant implication on the evolution of the domestic market structure. This paper builds a simple theoretical model which considers firm level asymmetries in terms of time of entry, costs of production, and firm-specific intangibles under oligopolistic competition in explaining the evolution of markets in the context of the Indian industry. 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, for four of out of six industries studies, show that new entrant MNCs export at higher intensity than incumbents. Exports at the initial period helps new entrants to realize minimum efficient scale and subsequently adopt strategies towards enhancing domestic market shares. The results suggest a positive explanation of domestic market shares of firms by their relative technical efficiency in production. Increased competition form new entrant multinational firms is driving domestic firms to undertake deliberate technological efforts for enhancing production efficiency. Investment in research and development expenditure (in the host Indian market) appears to be more important for domestic firms than for new entrant multinationals for increasing technical efficiency in production.