After following inward oriented economic policies for nearly four decades, India opened up to international trade and investment in early 1990s. The reduction of trade barriers along with simplification of foreign direct investment regime significantly increased the global integration of Indian economy in general and manufacturing in particular. The increase in global integration also coincided with an impressive increase in manufacturing growth. The manufacturing output growth which declined soon after the implementation of reform started improving toward the end of year 2001 and by the end of 2002, Indian manufacturing embarked on one of its best growth cycle ever. The growth momentum was sustained till late 2007 when global melt down plugged it down to negative territory. However, despite hostile global environment the Indian organized manufacturing sector did manage to grow at an average annual rate of shade below 9 percent during 2000-01 to 2009-10, which, on a decadal basis, is the highest rate of growth achieved by Indian manufacturing during last sixty years. Given this impressive growth performance, it seems that the openness has benefited the manufacturing sector. However, this hypothesis needs proper empirical scrutiny. This paper is a moderate attempt in this direction. Using a panel of 47 manufacturing sectors, we explore the association between growth and various indicators of openness or internationalization in an endogenous growth model framework. Our results show that openness does lead to higher growth. We found that import, exports and FDI works as effective vehicles of international technology diffusion and hence allow the domestic firms and industries to move closer to the global technology frontier. Our results are robust to various econometric tests.
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05.09.2013.
REDETE 2014 - Researching Economic Development and Entrepreneurship in Transition Economies
