chapter  10
17 Pages

State–business relations and productivity in Indian industry

WithVINISH KATHURIA, S. N. RAJESH RAJ AND KUNAL SEN

Introduction The long-term growth and development across countries is driven to a large extent by productivity growth (Easterly and Levine 2001).1 Several studies exist that have examined the effect of different factors influencing productivity growth using industries or firms as units of analysis. Most of these studies highlight the role of trade openness, research and development (R&D) and market structure as major determinants of productivity growth (see, for example, Harris 1999; Bartelsman and Doms 2000; Tybout 2000; Chand and Sen 2002; Goldar and Kumari 2003; Isaksson 2007; and Mitra and Ural 2007). While trade, technology, and market structure are important determinants of productivity growth, there has been less recognition in this literature on the importance of institutions (North 1994). In this chapter, we examine the role of a specific set of institutions – effective state business relations (SBRs) – in explaining productivity growth across industries. By effective SBRs we mean a set of highly institutionalized, responsive, and public interactions between the state and the business sector. As has been noted in the case of East Asia, strong industrial performance has occurred in contexts where there were strong collaborative relations between the political and economic elites (Aoki 2001; Amsden 2001; Harriss 2006). While much of the literature on SBRs have looked at their effects on economic performance at the macro level (Sen and te Velde 2009), our interest in this chapter is to examine the micro-level impact of effective SBRs by testing for the effects of effective SBRs on manufacturing productivity. Our empirical context is Indian manufacturing, and we test for this impact both at the industry and firm level. Using a measure of effective SBRs developed by Calì et al. (2009) for the 15 major Indian states for the period 1994-2005, we examine whether the variation in total factor productivity growth (TFPG) across Indian states can be related to variations in effective SBRs across these states. We also investigate the impact of effective SBRs on firm performance across various firm-specific characteristics by using pooled cross sectional data for the Indian formal manufacturing firms for 1989-90 to 2004-05.