Abstract
A number of developing countries have enacted pro-market reforms to transform their economies from socialist to market economies. These reforms bring sweeping changes in the economic and competitive landscapes of these countries, with significant consequences for firm performance. We integrate Douglass North's theory of institutional change with gains from governing the economy through market forces relative to government control to theorize a U-shaped relationship between pro-market reforms and firm profitability. We also theorize that the U-shaped relationship will be shallower for foreign firms and top business group firms relative to independent firms. We test and find support for the theorized relationships in a large sample of 122,534 observations taken across 18,591 firms in India, as it has implemented pro-market reforms.
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