Labour-intensive export failure

Annavajhula JC Bose | Updated on November 01, 2020

The book analyses why India failed where China succeeded

Undergrad economics students often wonder why India failed to become a large-scale labour intensive exporter like China. The book under review goes into this issue in some depth.

Since the reforms initiated from 1978, China has transformed itself into a middle income country and by 2010 the World Bank classified it as an upper middle income country.

In the process, China lost its advantage in low labour costs for exporting manufactured goods. Besides, China’s one child policy has caused a gradual decline in its young population rendering its labour intensive exports policy unsustainable.

By contrast, India, leveraging its demographic dividend could have successfully replicated the labour-intensive export model, especially under the current NDA regime which is keen on pushing its ‘Make in India’ strategy.

Written by Corporate Strategy professor from IIM Bangalore, International Trade and Investment Behaviour of Firms is a timely assessment of India’s failure to achieve labour intensive exports. The author attributes India’s failure to emulate the China model to factor market distortions, infrastructure bottlenecks, substandard primary and secondary education, and delay in clearing of large scale investments.

Successive governments have not invested enough on English medium education in the post reforms period which saw many MNCs entering the country.

India also failed to attract labour intensive foreign direct investment and global value chains for employment generation and increasing the volume of trade and consequently growth.

The increasing income and wealth inequalities in the country have made domestic demand and market segmented for differentiated goods and thereby constrained the scale economies’ advantage in expanding intra-industry trade and international investments.

The author’s analysis of disaggregated qualitative changes in the post reform period is noteworthy.

The import substitution policy regime of the pre-reform period in India had led to entrenched monopolies in the domestic market.

While domestic companies focussed on maximising profits in the domestic market, the relatively inefficient and capital intensive firms undertook exports! Given the factor market segmentation, small and medium firms had adopted labour intensive technologies.

But these firms faced high transaction costs. Subcontracting between large and small firms was widespread in several engineering industries but the small firms were disadvantaged by high transaction costs. This drove some small firms that had reached a critical size and productive efficiency levels to branch out to exports, in the post reform period. For large firms, the intra-industry trade possibilities were minimal as unequal income distribution vertically segmented product differentiation and restricted them to realise scale economies despite availability of cheap labour.

However, as India grew in the post reform period, the increased per capita incomes generated possibilities for realisation of scale economies and exports in some sectors such as small cars, motorcycles, and electronics goods, which also had a high degree of exposure to MNCs.

Larger firms have undertaken exports, entailing larger in-house R&D investments to ensure quality products and productive efficiencies. An export-led strategy has made firms, large and small, to gain access to world standards resulting in productivity gains. And imports have implied technology inflows with implications for productivity and quality boost.

But the Indian economy still remains a high transaction cost one with low levels of ease of doing business. This has constrained the potential gains of economies of specialisation of greater degree in local and globally oriented supply chains.

IT success story

Only in software and related services, India could leapfrog in exporting technology and human capital intensive goods and services. However, technologies are changing rapidly and flowing across the globe at greater speed. This has turned out to be a deterrent for Indian software firms in moving up the technology value chain even as India’s higher educational institutions have failed to produce high quality graduates. Some Indian firms have invested in skill training and set up greenfield ventures in the developed countries to tap skilled workforce there.

The author’s analysis of export performance of firms in the pre- and post-reforms period lays bare the variegated realities of Indian industry.

The book, inspired by the work of Nobel laureate Michael Spence, is rich in theoretical underpinnings and econometric exercises, which will be most useful for graduate and doctoral students.

(The review is with the Department of Economics, Shri Ram College of Commerce, Delhi)

Title: International Trade and Investment Behaviour of Firms

Author: Murali Patibandla

Publisher: Oxford University Press

Price: ₹1,495

Published on November 01, 2020

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