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Energy Intensity and Firm Performance: Do Energy Clusters Matter?

Santosh Kumar, Sahu and K., Narayanan (2011): Energy Intensity and Firm Performance: Do Energy Clusters Matter?

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Abstract

According to the basic law of supply and demand, as the cost of energy input rises, ceteris paribus, producer prefers to employ smaller quantity of energy input and substitute cheaper inputs for more expensive energy during the production process (Schurr, 1982; Jorgenson, 1984). Hence, the question arises whether determinants of profitability of firms differ based on different types of energy consumption. In analyzing this phenomenon for Indian manufacturing industries, this study tries to find out the determinants of profitability of firms based on three energy clusters (natural gas, petroleum and coal) of Indian manufacturing industries. This study uses data from the PROWESS database provided by the Center for Monitoring Indian Economy from 2000-2008. The finding of the study suggests that capital intensity, age of the firm and MNE affiliation of firms are the common determinants of profitability for different energy clusters in Indian manufacturing industries. However, the determinants of profitability differ for variables such as energy intensity, size of firm and R&D intensity and based on the choice of primary source of energy consumption. In the debate of CDM, climate change; shifting from traditional fuel sources to recent fuel source might help in reducing CO2 emissions, specifically for developing country such as India. Fiscal policies support to industries such as value-added tax exemption for new energy conservation products, import duty reduction and exemption for energy conservation technology might help Indian manufacturing industries to increase the profitability as well as energy efficiency.

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