Has Liberalization Affected Profit Margins in Indian Industry?

32 Pages Posted: 16 Oct 2005

See all articles by Uma S. Kambhampati

Uma S. Kambhampati

University of Reading - Department of Economics

Ashok Parikh

University of East Anglia

Abstract

In this article, we analyse the determinants of firm-level profit margins in Indian manufacturing. The model we estimate is rich in its dynamic characterization allowing as it does for lagged terms, trend movements, business cycle effects and a structural break in 1991. We hypothesize that the reforms undertaken by the government in 1991 constitute a structural break that influences a firm's independence to react to other firms as well as the extent of competition faced by these firms. Inserting this into the standard industrial organization model of profits, we obtain a dynamic market model. Estimating this model for 1980-1998, we find that the 1991 reforms did have a significant impact on profit margins in Indian industry. The reforms have worked through their impact on a firm's behavioural variables - advertising, Research and Development (R&D), capital-output ratios and managerial remuneration - though the precise variables that were significant varied from sector to sector. We find that relatively inefficient firms make significantly lower profits than others both before and after the liberalization as expected.

Suggested Citation

Kambhampati, Uma S. and Parikh, Ashok, Has Liberalization Affected Profit Margins in Indian Industry?. Bulletin of Economic Research, Vol. 57, No. 3, pp. 273-304, July 2005, Available at SSRN: https://ssrn.com/abstract=800172

Uma S. Kambhampati (Contact Author)

University of Reading - Department of Economics ( email )

Reading, RG6 6AA
United Kingdom
+118 987 5123 (Phone)
+011 897 5236 (Fax)

Ashok Parikh

University of East Anglia ( email )

Norwich, Norfolk NR4 7TJ
United Kingdom
+44 0 208 580 0661 (Phone)

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