| Summary: | Recent trade theory emphasizes the role of market-share reallocations across firms
(“stealing”) in driving productivity growth, whereas previous literature focused on
average productivity improvements (“learning”). We use comprehensive, firm-level data
from India’s organized manufacturing sector to show that market-share reallocations
were briefly relevant to explain aggregate productivity gains following the beginning of
India’s trade reforms in 1991. However, aggregate productivity gains during the period
from 1985 to 2004 were largely driven by improvements in average productivity. We
show that India’s trade, FDI, and licensing reforms are not associated with productivity
gains stemming from market share reallocations. Instead, we find that most of the productivity improvements in Indian manufacturing occurred through “learning” and that
this learning was linked to the reforms. In the Indian case, the evidence rejects the
notion that market share reallocations are the mechanism through which trade reform
increases aggregate productivity. Although a plausible response would be that India’s
labor laws do not easily permit market share reallocations, we show that restrictions on
labor mobility cannot explain our results.
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