Exchange rate exposure and firm productivity in India

Abstract

PurposeThe purpose of this paper is to investigate the linkage between exchange rate exposure and firms’ productivity in India. This study also tries to compare the effects of exchange rate exposure on the productivity of the pre- and post-financial crisis periods and also between export- and import-oriented firms.Design/methodology/approachBy using the annual data of 232 manufacturing and service sector firms for the period of 2000-2013, this paper examines the exchange rate exposure and firms’ performance in India. In the first stage, the two-factor regression model, Adler and Dumas, is used, and in the second stage, the Levinsohn and Petrin (2003) approach is used for estimating the total factor productivity of significant firms. Finally, for examining the relationship between exchange rate exposure and productivity, the instrumental variable panel data regression model is used.FindingsThis study observes that a negative relation exists between the appreciation of exchange rate exposure and firms’ productivity. The study also reveals that the export-oriented firms make loss during exchange rate appreciation which decreases the productivity. The financial crisis has the negative impact on productivity, as well.Originality/valueAlthough there are an ample number of studies which examined the effects of the exchange rate on firm’s export, growth, investment, however impact of exchange rate exposure on productivity at firm level is scanty. This study tries not only to compare the effects of exchange rate exposure on the productivity of the pre- and post-financial crisis periods but also between the export- and import-oriented firms which is another innovation of this study.