The impact of trade and labor market regulations on employment and wages : evidence from developing countries

Abstract

We use firm-level data from Indian manufacturing industries to explore the determinants of exports, focusing especially on the role of technology. Our empirical analysis is based on a two-part estimation strategy whereby we first explore which factors influence a firm's participation in export markets and then explore which factors influence the volume of exports of exporting firms. Our results reveal that technology related activities, including investments in R&D and technology transfers from foreign firms, can play a useful role in enabling firms to enter export markets. This is especially so in the scientific group of industries where the scope for technological advances tend to be large and where design changes in both products and processes can be frequent.

However, our results also suggest that technology alone is unlikely to be the basis on which India's manufacturing sector can expand its exports significantly. In particular, our results indicate that the most important determinants of export volumes turn out to be firm size and labor intensity. From a policy perspective these results have a special relevance for the ongoing debate on India's reform efforts. Although the liberalization process which began in earnest in 1991 has alleviated many of the restrictions that industrial policy imposed on firm size, India continues to reserve certain labor intensive products exclusively for small-scale production. If large firms have an advantage in exporting, and the estimates here certainly lend strong support to this view, then the policy of reservation is likely to remain a drag on Indian exports of products in which labor abundant India should have comparative advantage.