DP8011 Services Reform and Manufacturing Performance: Evidence from India

Author(s): Jens Arnold, Beata Javorcik, Molly Lipscomb, Aaditya Mattoo
Publication Date: September 2010
Keyword(s): foreign direct investment, liberalization, productivity, services reform
JEL(s): D24, F2, L8
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8011

Conventional explanations for the post-1991 growth of India?s manufacturing sector focus on goods trade liberalization and industrial de-licensing. We demonstrate the powerful contribution of a neglected factor: India?s policy reforms in services. The link between these reforms and the productivity of manufacturing firms is examined using panel data for about 4,000 Indian firms for the period 1993-2005. We find that banking, telecommunications, insurance and transport reforms all had significant positive effects on the productivity of manufacturing firms. Services reforms benefited both foreign and locally-owned manufacturing firms, but the effects on foreign firms tended to be stronger. A one-standard-deviation increase in the aggregate index of services liberalization resulted in a productivity increase of 11.7 percent for domestic firms and 13.2 percent for foreign enterprises.