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International Trade and Investment Behaviour of Firms  by Murali Patibandla, Oxford University Press, 2020; pp 240, `1,495 (hardcover).

International trade and investments that enhance allocative efficiency and economies of specialisation are important drivers of growth. It leads to investment and technology flows and also generates employment. Post independence, India through its indicative planning might have underplayed ­export growth and relied more on import substitution. This eventually led to resource misallocation, inefficiency, and rent-seeking, and the export pessimism was used as an opportunity for thriving on the basis of protected markets. The central thesis of Murali Patibandla’s book Interna­tional Trade and Investment Behaviour of Firms is that export propensities of firms show a non-linear relationship with size and that the change in policy regime, particularly that of invoking liberalisation policies, has enhanced competitiveness and x-efficiency of firms.

In the context of the post-liberalisation phase, the book persuasively argues that engaging with transnational corporations (TNCs) subject to macro conditions, such as protection of property rights, potential markets, and availability of requisite skills helped enhancing technological and org­a­nisational heterogeneity and stimulated investment in technology. It entails a micro-­theoretic framework analysing the principal hypotheses of export behaviour of firms drawn from a detailed analysis of firm behaviour by size category of firms in dirigisme. In the context of a liberalised regime, the ­author shows a significant change in export propensity and technical efficiency of large-sized firms.

Patibandla’s work proposes India’s story as something different from what foll­ows from the standard Cournot oligopoly model that large firms with higher share in domestic market due to their low cost of production and monopoly power will tend to export at higher intensity. On the contrary, due to inward-oriented policies offering protected home markets, large firms remained confined to home markets as they could derive higher profits due to protection compared to what they could get from ­export markets. Product and factor markets condition firm behaviour and because of persisting market imperfections in the capital market large firms availed differential access to capital. The small firms did not get such advantages and they branched out to export markets where they had to compete with large firms as well but did not face asymmetric access to markets. The prevailing duty structure also resulted in a higher effective rate of protection for final products and lower rates for components and intermediaries.

This went in favour of large firms all­owing them in extracting monopsonic rents through subcontracting relations with small firms and also through higher vertical integration they could pass on the burden of market fluctuations to smaller firms down the production chain. Large business groups could actually diversify in sectors where effective rate of protection was higher and hence could increase their market share. Large firms eyed exports to prevent a fall in domestic prices and also collaborated with foreign brands to wield greater market power and profitability in the domestic market. More importantly, large firms ventured into export markets for products where effective rate of protection was low. Hence, protection was used not to enhance competitive capabilities but a larger share of home market and market power was essentially used as a shelter to avoid export competition. The efficient small firms, on the contrary, attempted exports as international markets are infinitely elastic and the costs of working capital used to be relatively less and export performance also exalted the status of these firms in the home market.

In this context, Patibandla’s insightful analyses draw our attention to a structural duality of market and consequent firm behaviour by size classes. The domestic market turns out to be price-elastic as mass markets happen to be and the big firms took advantage of such a market, cornering a larger share of the home market but they turned out to be uncompetitive in foreign markets that show high income elasticities. The efficient small firms, on the other hand, being exp­osed to foreign competition were capable of responding to foreign markets but could not expand in terms of scale as the domestic demand for such products were less. In the foll­owing chapter, the author technically add­resses the prevailing non-linear relationship and estimated the turning points in the non-monotonic relationship between export propensity and size of firms. It is further argued that large firms that were efficient and eme­rged to be market leaders in home market were less inclined to exports, while firms that lost out in the home market showed higher propensity of exports.

The exercise also shows that higher labour intensity may not be associated to higher exports and large firms were generally found to be X-inefficient. The study empirically measures technical efficiency in reference to potential technical frontier and appraised it as a combined ­effect of both technical efficiency as well as of diff­erences in technology levels. It separates technical efficiency and allocative efficiency by experimentally pushing all firms to the optimum frontier and shows that small firms attain technical efficiency only when they reach a threshold size and beyond this critical threshold, firm size was negatively related to exports. In fact, firm size and technical inefficiency assume a u-shaped relationship. More importantly, the empi­rical exercise suggests that managerial experience and skilled labour intensity show no significant impact on exports. Also, the higher the systematic allocative effi­ciency based on the shadow factor prices, the higher will be the export propensity.

In the post-reform period, the book mainly focuses on the entry of new firms, particularly of TNCs and their impact in terms of technology transfer, enhancing organisational efficiency of Indian firms and indigenisation of products. Referring to Suzuki, Honda, and Hyundai cases, the discussion focuses on the adaptation to local conditions of demand, the growth of public and private institutions in generating the requisite differential skills, analyses product differentiation and subcontracting at the micro level and the advantages of getting inserted into global value chains. The discussion also stretches to India’s participation in global services value chains referring to high-tech cluster in Bengaluru. It is argued that international integration created backward and forward linkages and that export-oriented clusters contribute more in local development.

It proposes an analytical model arguing that the entry of TNCs have reduced monopsony power of local firms and also ensured wage increases for local employees. With reference to three industries, namely two-wheelers, automobiles, and auto components using panel data covering firm-level information for the period 2007 to 2018, the study shows a positive relation between exports and firm size in the post-reform era. It is primarily because of technical efficiency showing a positive significant relation with vertical integration. The organisational efficiency also increased owing to changing business organisations from centralised family-owned firms to bottom-up decentralised structures. An econometric ana­lysis using an augmented Cobb–Douglas production function also shows that inter­national tra­de generates strong positive externalities.

In Chapter 9 and the last part of the book, the author seems to derive general conclusions about the post-reform success, mostly referring to information technology (IT) companies. Increased competition in the domestic market due to reforms made joint ventures possible. Drawing from literature, the author argues that the success of local companies and their engagement with foreign firms succeeded not because of the availability of low-paid skilled and unskilled workers but because of low overhead costs, through building networks and relationships, due to availability of debt capital from public and private banks and that of internal funds by diversified business groups. Mergers and acquisitions have been the dominant mode for imparting governance for these firms.

Market Mantra and Missing Woods

Patibandla’s work offers deeper insights on firm strategies marshalled by adequate empirical exercise in the context of India’s changing policy regimes. The central message on the pre-reform period is that private players, particularly large firms, enjoyed monopoly in the home market in a protective regime, which led to export pessimism, slack in attaining competitive capabilities, and x-inefficiency. This created a dichotomy in firm behaviour by size categories, where big winners catered to price-elastic dome­stic mass market and could not penetrate in income elastic demand in export markets. The efficient small firms above a critical threshold size could thrive in high-end export markets because they were forced to acquire competitive capabilities as they were not privileged by the protective measures of dirigisme. In the post-liberalisation phase, with higher global integration and enga­gement, TNCs acquired competitive capabilities and such capabilities improved the local firms’ performance as well. In sum, liberalisation rev­ersed the distorted negative association bet­ween export performance and size category of firms.

The story offers a partial appraisal of overall industrial development mainly based on automobile and IT industries and missed out sectors that were holl­owed out due to opening up and rising import intensity. It is almost beyond dispute that large firms took advantage of the state-led indicative planning and did not grow up in terms of competitive cap­abilities necessary to face global markets. In fact, they were the beneficiaries of the state-led regime, they shied away from the high risk, low profitability inf­rastructure and capital goods sector, benefited from state-subsidised inputs and utilities, diversified by cornering lic­ences and also from an emerging market cordoned from foreign competition. But it would be inappropriate to account for the failure of big private capital in attaining competitive capabilities to state- guided industrialisation per se because it is the failure of the Indian state which could not discipline the industrial class in ensuring competitiveness as against benefits offered, the way it happened in the case of East Asian nations, which industrialised later, as well as in China.

Similarly, export performance has been considered as a guiding indicator of firms’ competitiveness in the global market but such competitiveness also emer­ges out of specialisations that big producers attain by taking advantage of skills and technologies that they acquire by producing for domestic markets, particularly in the case of large developing countries. Instead of acquiring capabilities by expanding the domestic market, large firms emerged in post-independence India as premature monopolies without facing competition even in the domestic market, which eventually led to a truncated industrial growth and that did not get reversed even after liberalisation.

Finally, firms in certain sectors may gain out of global integration in terms of productivity and efficiency but that may not trickle down through technology diffusion as has been assumed; instead the technology gap may increase due to fast-moving frontier and slow diffusion of technology. In fact, global integration by itself and market shocks may not ­always ensure a faster pace of enhancing competitive capabilities and a broad-based diffusion of it, the way Patibandala might like to suggest. On the contrary, such integration may push a country towards a Ricardian pattern of trade specialisation, the gains through which may eventually decline due to competition with low-cost producers in the same segment and also would restrict the ind­ustrial base only to certain sectors. Ins­tead of blanket presumption that competition owing to global integration itself solves problems, what might be necessary is a coherent strategy of the state for calibrated engagement with the global market and ruthless disciplining of the industrial class rather than state bureaucracy colluding with big private capital giving rise to cronyism.

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