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State business relations and manufacturing productivity growth in India

Kathuria, Vinish and Seethamma Natarajan, Rajesh Raj and Sen, Kunal (2010): State business relations and manufacturing productivity growth in India.

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Abstract

Empirical studies on total factor productivity growth (TFPG) in developing countries highlight trade open-ness, research and development and market structure as being the most important determinants of TFPG. The role of institutions remains overlooked in the literature on the determinants of TFPG. In this paper, we look into the role of institutional quality as captured by effective state-business relationships (SBRs) in influencing TFPG, using Indian manufacturing as a case-study. By SBRs we mean a set of highly institutionalised, responsive and public interactions between the state and the business sector. To compute TFPG, we use firm level data for both the formal and informal manufacturing sector. We correct for the simultaneity bias associated with the production function approach for TFPG estimation by employing a method developed by Levinsohn and Petrin. We propose measures of effective SBRs for 15 Indian States over the period 1994-2005, and then use them in TFP growth equations to estimate the effect of SBR on TFPG. The results indicate that SBR has positively affected the TFP growth of Indian industry. The effect however is primarily for the formal sector.

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