Effects of Chinese Import Competition on Plant Productivity and Product Scope: Evidence from India

Abstract

How trade shocks emanating from a low-wage country affect the productivity of manufacturing plants in other low-wage countries has been little researched. This paper investigates the impact of Chinese import competition on the performance of Indian manufacturing sector through the lens of theoretical models of multiple-product firms using plant-level ASI panel data from 1998 to 2009. Increased import competition from China leads to an improvement in revenue productivity, and a reduction in product scope. A 10 percentage point increase in exposure to Chinese imports leads to a 3.8 percent increase in revenue productivity of large plants and a 1 percent decrease in the number of products within-plant. However, the impact on selection of products within-plant is not symmetric. The evidence suggests that product rationalization is one of the key channels through which trade shocks can affect plant productivity. Although import competition from high-wage countries has no statistically significant impact on plant performance or product scope, plant product-level adjustment shows that import competition shocks from high-wage countries and China have similar impact on selection of products within-plant.