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DECRG Trade Seminar: The Impact of Trade Liberalization on Productivity and Firm Size: Evidence from India's Formal and Informal Manufacturing Sectors

Sponsor: Development Economics and Chief Economist (DEC)

Speaker: Shanthi Nataraj,University of California, Berkeley

Summary: Despite a large literature investigating the impacts of trade on firm productivity, there is almost no evidence on how small firms react to trade liberalization. In this paper, I show that India’s unilateral reduction in final goods tariffs increased the average productivity of its manufacturing firms by 15%. Using a unique dataset of firm-level surveys that are representative of the entire Indian manufacturing industry, I document that this result was driven by an increase in productivity among small, informal firms, which account for 80% of Indian manufacturing employment but have been excluded from previous studies. I also examine the effect of the fall in tariffs on the distributions of productivity and firm size, and find evidence consistent with the exit of the smallest, least productive firms from the informal sector.

For Information: Yasmin D Souza

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