Globalisation: Productivity, Efficiency

and Growth
An Overview
N S SIDDHARTHAN

I
Introduction

ndia began liberalising its economy and, in particular, its

manufacturing sector over a decade ago. One of the objectives
of liberalisation has been to make Indian industries more
efficient and globally competitive. Towards this end, the government of India has been pursuing three sets of reforms: one,
disbanding the complex network of industrial controls, industrial
licensing and permits system; two, liberalising foreign trade and
currency transactions and three, instituting several measures to
facilitate foreign direct investment (FDI) inflows. These measures
were launched in the year 1991 and the liberalisation process
is still continuing. It was argued that the removal of entry and
licensing barriers would expose Indian firms to international
competition and compel them to improve their efficiency and
productivity and introduce new processes and products. Trade
reforms aimed at exposing Indian firms to global markets will
compel them to produce better quality goods. Removal of import
restrictions and currency transactions will enable them to import
better quality materials, components and technology. FDI inflows
will have technology and productivity spillover effects and would
improve the productivity of Indian firms.
After a decade of experience, we now have enough data to
test the impact of the globalisation and liberalisation policies on
Indian industry. In this context, the following questions assume
importance: have there been appreciable productivity increases
in Indian industries? Is it possible to analyse the impact of trade
policy reforms on the productivity of Indian firms? Some of the
studies conducted for the post-liberalisation period report mixed
findings [Balakrishnan, Pushpangadan and Babu 2000; Krishna
and Mitra 1998; Srivastava 1996, 2000; Bartelsman and Doms
2000; Goldar and Kumari 2003]. The equivocal nature of the
results of the studies conducted for India and other developing
countries raises several other important questions relating to the
usefulness of inter-industry studies and the reliability of total
factor productivity estimates [Bartelsman and Doms 2000]. For
example, inter-industry studies assume that all firms in an industry
behave alike and therefore industry level characteristics could
be attributed to all the firms operating in that industry. However,
during an era of liberalisation, new firms with more advanced
technology are likely to enter an industry and the existing firms
are expected to develop a strategy to meet the challenge from
the new entrants and in particular, the multinational enterprises
(MNEs). Under these circumstances, the homogeneity assumption
that is, all firms in an industry are alike, might not be valid [Liu
and Tybout 1996 and Liu 1993; Bartelsman and Doms 2000].
In an industry consisting of a variety of firms that differ in terms
of their access to technology, knowledge and other intangible
assets, liberalisation would result in gainers and losers and the
productivity gap between firms in an industry could widen.
Therefore, given the heterogeneity of firms in a given industry,
the average productivity levels of an industry need not increase
due to liberalisation. Consequently, inter-firm analysis could prove

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more valuable. Likewise, total factor productivity is measured

as a residual term, which assumes that technology is free and
that there are no search, assimilation and adoption costs. It also
assumes a single production function. These assumptions have
been questioned in literature and alternatives have been suggested
[Tybout 1992; Nelson and Winter 1977; Nelson and Pack 1999].
Secondly, do the entry of MNEs with superior technology and
management skills result in spillovers thereby increasing the
productivity of the domestic firms? How does one test for the
spillovers? In case there are spillovers, which set of domestic
firms are likely to gain and which set could end-up as victims?
While some studies argue that firms with smaller technology and
productivity gaps will benefit more, the opposite case is argued
by another set of studies [Kokko, Ruben and Mario 1996; Liu,
Wang and Wei 2000; Haddad and Harrison 1993].
Next, do MNEs from different home countries behave alike
with regard to productivity and spillovers or do they differ? If
they differ, then, is the difference dependent on the country of
their origin (home country)? In particular, do western MNEs
behave differently from the Japanese MNEs? This issue is important
as the Japanese MNEs are known to follow policies that differ
with regard to management practices, sourcing of materials and
components, and growth strategies when compared to the western
MNEs like those belonging to the US and western Europe
[Kojima 1978, 1986, 1991; Siddharthan 1997].
Lastly, did the introduction of new technologies consequent
upon economic liberalisation result in a technological paradigm
shift in the sense of a complete change in the manufacturing
configurations? What are the consequences of a paradigm shift
for the efficiency and growth of firms?
The authors of the following six papers, have been associated
with the Institute of Economic Growth (IEG) and have been
working on these questions for some time now. After their
completion, these six papers were presented and discussed at a
daylong seminar organised by IEG on September 5, 2003. The
papers have been revised taking into account several useful
comments and suggestions received at the seminar.

II
Overview of Papers
We begin this collection with a paper [Das 2003] that explores
the nature and magnitude of total factor productivity growth
(TFPG) under different trade regimes. The paper identifies four
distinct phases of Indias trade liberalisation and analyses the
productivity behaviour under each phase. While analysing the
productivity growth, the paper employs the growth accounting
methodology using data set at three-digit level of 75 industries
and also use-based sectors. As is well known, the growth accounting approach depends on the existence of an aggregate
production function and the validity of the marginal productivity
theory of pricing. The later papers in this volume mainly use firm
level data and overcome the limitations imposed by inter-industry
analysis. Nevertheless, to be in conformity with several earlier
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January 31, 2004

studies, it is important to begin the series with an inter-industry

study, compare the results with other studies and then move on
to studies based on inter-firm data. The study by Das shows that
the TFP growth in the 1990s was lower than in the 1980s. In
addition, for all three use-based sectors, the TFP growth in the
second half of the 1990s (1996-2000) was lower than the first
half of the 1990s (1991-95). Consequently, as per the results of
this study in the post-liberalisation period total factor productivity
did not contribute much to growth. This result is also in conformity with the result of some of the earlier studies. Nevertheless,
as stated in the introductory section, this result could be due to
the main limitations of the inter-industry studies. The rest of the
papers included in this issue mainly deal with inter-firm analysis
and it would be interesting to compare their results with this one.
The second paper [Ray 2003], analyses the impact of
liberalisation measures and the consequent technological changes
on the efficiency of firms. The paper argues that the impact would
depend on whether the technological changes are incremental
or paradigmatic. It considers incremental changes as a movement
along the trajectories and paradigmatic changes as involving
changes in the frontier itself. Paradigmatic changes would lead to
an increase in efficiency of the firms adopting it but this could raise
the distance between the frontier and the average firms. The net
result could be a decline in the average efficiency of the industry.
For example, Srivastavas (2001) study on technical efficiency
for the period 1980-81 to 1996-97 reported a decline in the mean
efficiency during the 1990s compared to the pre-liberalisation
period of 1980s, a result that is similar to that of Das (2003).
Her results show that for the Indian manufacturing sector taken
as a whole the average efficiency levels had declined over the
period 1991 to 1996, a result similar to earlier studies that used
a different methodology. However, after 1996 there has been an
improvement in the average efficiency though it has not reached
the 1991 levels. On the other hand, there were inter-industry
differences. In the second part of the paper the efficiency estimates discussed in the first part are used as the dependent variable
in the regression exercise. For each of the years 1991 to 2001,
separate regressions have been run to explain the factors affecting
these efficiency estimates. The results show that foreign ownership or MNE affiliation was significant in explaining efficiency
and the value of its coefficient increased over the years. Furthermore, among the domestic firms, that is, firms that are not
affiliates of MNEs, non-equity strategic alliances, a variable
captured through royalty payments in foreign currency for technology imports emerged important. This variable was not important in the early 1990s but emerged significant in the later
half of the 1990s. In addition capital intensity was also important.
In sum MNE affiliates, domestic firms that imported technology
through royalty payments and used capital intensive methods
emerged more efficient than the rest.
The paper by Goldar, Ranganathan and Banga (2003) analyses
the effect of ownership on the efficiency of engineering firms
in India in the 1990s. Technical efficiency of firms is estimated
with the help of a stochastic frontier production function
using parametric techniques. A comparison of technical
efficiency is made among three groups of firms in Indian
engineering: (1) firms with foreign ownership, (2) domestically
owned private sector firms, and (3) public sector firms. In particular
the paper poses the following two questions: Was the technical
efficiency of foreign owned firms generally higher than that of
domestically owned private sector firms and public sector firms?
How far could the domestically owned firms catch up with the
foreign firms in terms of technical efficiency during the 1990s?
Their study shows the mean technical efficiency of foreign firms
to be higher than that of the domestic firms, both private and public
sector enterprises. Furthermore, their results indicate that there has
been a process of convergence in technical efficiency among Indian
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January 31, 2004

engineering firms during the 1990s the domestically owned firms

tending to catch up with the foreign firms. However, this process
of convergence weakened in the second half of the 1990s. Thus
this study reconfirms the higher efficiency levels enjoyed by MNEs
and their affiliates and at the same time shows the narrowing of
the gap between the two groups over the years. The narrowing of
the gap does indicate the existence of spillovers from MNEs to
the domestic firms. Furthermore, this study establishes a positive
relationship between the trade orientation of a firm and the level
of its efficiency. Trade liberalisation seems to have contributed to
the efficiency of the Indian enterprises.
The paper by Siddharthan and Lal (2003) argues that in analysing
the impact of liberalisation on productivity spillovers, it is essential
to take into account the entry of new enterprises and the exit
of some older ones. Furthermore, the value of the spillover
coefficients could change over time. Therefore, estimating an
average coefficient (averaged over several years) may not reflect
the changes in the spillover effects. In addition, labour productivity measures used by earlier studies do not take into account
heterogeneity in the skill content of the workforce. In their study,
therefore, they advocate another measure, namely, value added
per unit cost of labour, which avoids the problem posed by skill
diversities and the consequent wage differentials of the workers.
Instead of combining cross-section and time-series data, they
estimate separate equations for each year from 1993-2000. This
procedure aids in studying the possible changes in the behaviour
of the determinants over the years. In addition, they also used
panel data techniques, combining time-series with cross-section,
and estimated fixed effect models. The results of the balanced
panel models are not different but panel data methods could
produce only an average coefficient (average for the whole
period) for the respective variables and cannot show the changing
trend in the coefficients. The balanced panel does not take into
account the entry and exit of the firms. Therefore, the authors
do not prefer this procedure.
Their results show a rapid increase in the values of the spillover
coefficients over the years. It is also evident that spillovers are more
likely to occur in cases where the technology-gap between the MNE
and the domestic firm is small. The results also show that value added
per unit cost of labour of local firms is high wherever the corresponding values of the foreign firms are also high. This result holds
good even after the introduction of industry dummies in the unbalanced panel. By and large, firms with higher labour productivities
gained by spillovers while others with lower productivities (larger
gaps) did not benefit by spillovers. In other words spillovers are
possible only if the firms are in a comparable technological paradigm.
In the liberalised environment, MNE affiliates seem to enjoy
productivity and efficiency advantages. Nevertheless, this raises
a further question, namely, do all MNEs behave alike or do home
country specific characteristics influence their behaviour? Bangas
(2003) paper concentrates on this issue. The paper analyses the
impact of the source of foreign direct investment on its productivity growth. Productivity growth in the Indian manufacturing
sector is carried out for Japanese-affiliated, US-affiliated and
domestic firms in three broad industrial categories, where both
Japanese and US firms are significantly present, namely, automobiles, electrical and chemicals for the period 1993-94 to
1999-2000. She carries out the estimations at three levels. First,
TFPG is estimated using time-variant firm specific technical
efficiency approach (parametric approach) and average TFPG in
the Japanese-affiliated firms is compared to that in the USaffiliated and domestic firms. Second, the impact of the source
of affiliation on TFPG of a firm is estimated using least square
regressions on seven-year averages. Finally, to investigate to what
extent inter-firm differences exist in explaining TFPG and to what
extent TFPG in a firm is explained by technical progress and
efficiency growth, Data Envelopment Analysis (non-parametric

421

approach) is carried out and Malmquist indices are estimated

using panel data in the three industries.
Her results show that affiliation with foreign firms of different
countries-of-origin would lead to differential impact on TFPG
of a firm. She finds that Japanese affiliates enjoy higher productivity growth, after controlling for other firm-specific and
industry-specific effects compared to the US affiliates. Total
factor productivity growth can occur either due to technological
progress, i e, due to shift in the production function or due to
efficiency improvements in the firm. She deploys DEA analysis
using panel data set to further disaggregate the technical efficiency change indices and technological change indices. The
results suggest that the major source of TFPG in all the three
industries for Japanese-affiliated firms is increase in efficiency
while for the US-affiliated firms it is mostly technological progress.
This result is as anticipated in literature as the Japanese firms
have managerial advantages like Japanese management techniques, just in time delivery, total quality management, and
quality circles.
The last paper in the series [Narayanan 2003] deals with the
determinants of the growth of firms in a sector (automobiles),
that underwent rapid technological change and saw the entry of
new firms in the liberalised era. His sample covers the period
1980-96. He identifies two policy changes during the period,
namely, partial deregulations introduced in 1985 and liberalisation
measures launched since 1991. Consequently, three sets of
regressions are presented for the three periods Licensing
1980-81 to 1984-85, Deregulation 1985-86 to 1990-91 and
Liberalisation 1991-92 to 1995-96. Firms in the automobile
industry witnessed a change in basic technology configuration
of the production process during the sample period. Therefore,
he expects the technology factors to play a crucial role in determining the growth of firms. The study uses two-way fixed effect
estimation of the growth function. The results of the estimated
fixed effect model support the hypothesis that inter-firm differences in growth are determined mainly by variables capturing
technology paradigm and trajectory shifts. Thus growth is mainly
technology driven.

III
Conclusions
In sum evidence from these six studies using different methodologies and different data sets do not support the hypothesis
relating to an increase in productivity/efficiency in Indian
industries consequent upon economic liberalisation. Nevertheless, there have been inter-industry differences. There have been
major inter-firm differences in behaviour relating to technology
and growth strategies and the resultant productivity and efficiency differences. Some firms have gained by the liberalisation
and globalisation policies while others have lost. The main
gainers have been the MNEs and their affiliates which have better
access to technology and other intangible assets. To survive and
succeed in the global regime and to compete against the MNEs,
some of the domestic firms have adopted a strategy of entering
into non-equity strategic alliance with foreign and domestic firms
resulting in technology imports against royalty payments. These
networking firms have also done well. But other domestic firms
that have no networking or non-equity strategic alliances have
not done well. Within MNEs also there have been differences
depending on the source country. The main advantage of the USbased MNEs has been technology while for the Japanese MNEs
efficiency advantages seem to dominate. By and large, acquisition
of technology seems to be the main vehicle of growth and
domestic firms that enjoy better technological capabilities and
have a smaller productivity gap in relation to MNEs have

422

benefited by liberalisation policies. But firms that are stuck with

an earlier technological paradigm with large productivity gaps
have lost out. -29
Address for the correspondence:
nss@ieg.ernet.in

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