Institutional Regimes and Profitability Transitions: The Case of Indian Manufacturing Firms

Sumit K. Majumdar, Arnab Bhattacharjee

Research output: Contribution to journalArticle

Abstract

There is a substantial body of literature, spanning industrial organization economics and management science, which uses variance decomposition to understand the relative importance of firm, industry and business group effects in shaping variation in profitability. Some of this literature also analyses firm profitability in emerging economies under transition to liberalization. However, previous research has taken a static before-and-after view on institutional change. By contrast, we focus into the dynamic process of liberalization in India, analyzing how different institutional regimes condition changes in firm behavior leading to transitions in profitability. Based on a panel dataset of several thousand Indian firms, spanning the twenty-six year period between 1980-81 and 2005-06, we determine the relative importance of firm, industry and business group effects in explaining manufacturing firms’ profitability variances across different institutional phases and policy changes. Based on the panel structure of the data, we evaluate three propositions that help assess transition dynamics between phases. We determine the quantum of catch-up or falling behind by firms, also finding that different industries emerge as leaders, as the economy progresses through different phases of liberalization, and business groups with skills other than related to political economy emerge as performance leaders. Our approach demonstrates how to analyze the underlying detailed structure of firm level data, and performance outcomes, to derive nuanced interpretation of factors giving rise to the effects that explain profitability variances, and how to assess the way these effects behave over time. The dynamic approach highlights what factors matter, where, when and why in influencing profitability variances, which are a key dimension of economic performance.
Original languageEnglish
JournalIndian Growth and Development Review
Publication statusAccepted/In press - 11 Apr 2018

Keywords

  • firm
  • industry and group effects
  • institutional change
  • Indian industry
  • inter-temporal dynamics
  • liberalization
  • policy regimes
  • profitability variance analysis
  • transition patterns

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