Cost-effectiveness, Competitiveness and Export Performance of Indian Private Firms

Abstract

This paper formulates a model of the optimal export decision of private firms and then empirically studies the effect of firm size, R&D activities, competitiveness and trade policies on export performance of Indian private firms during the period 1975–1986. India practised restrictive trade and industrial policies and introduced partial liberalization of trade policies in the early 1980’s to encourage exports. The paper argues that the Cragg model is more appropriate to model firms’ export behaviours under India’s restrictive trade policies than the commonly used Tobit model. The evaluation of the export promotion and partial import liberalization policies of 1980 based on the Tobit model is found to be qualitatively quite different from the evaluation based on the Cragg model. The LR and LM specification tests reject the Tobit model against the Cragg model in all specifications.