Trade liberalization, imported inputs and factor efficiencies: Evidence from the auto components industry in India

Abstract

Firm-level data have been used to estimate changes in factor efficiencies_imported inputs being one of them-- over three sub-periods, 1977-84, 1985-91 and 1992-99 respectively denoting eras before liberalization, partial liberalization of the automotive industries and economy-wide liberalization. We see that the average size of firms has increased from that in the protected regime as the degree of liberalization has advanced. We find that the substitutability among inputs changed over the three sub-periods. We also find that the marginal products of all the inputs are very heterogeneous among firms in each period. The distributions of marginal product of labour and domestic materials and has moved to the left in the later periods while that of capital has moved to the right. The distribution of marginal product of imported materials first moved to the right and then to the left as compared to the first period. Overall the smaller firms benefited more in the earlier periods and bigger ones in the last period.