International Trade and Firm Performance: Evidence from India

Over the preceding three decades, international trade has played a transformative role in shaping firm performance in developing countries. In India, the trade liberalisation initiated in the early 1990s, coupled with rapid export expansion and greater involvement in global value chains (GVCs), has led to enhanced firm competitiveness. Utilising a range of econometric methods, this thesis investigates the underlying factors shaping international trade strategies of Indian manufacturing firms and the resultant direct and spillover effects. In looking at the international trade and firm performance nexus, we pay particular attention to i) diverse forms of engagement in international trade and GVCs; ii) Productivity spillover effects from exporting and importing firms on non-trading firms and iii) the role of finance in determining firms’ survival in GVCs. Our research spans from 2000 to 2019, a period marked by a progressive internationalisation of Indian firms in response to continuing trade liberalisation and firms’ engagement in GVCs.
The first empirical chapter examines Total Factor Productivity (TFP) spillovers from exporting and importing firms to non-trading firms. The analysis distinguishes between horizontal spillover effects (within the same industry) and vertical spillover effects (across different industries). We also perform a heterogeneity analysis by exploring spillover effects on firms belonging to and not belonging to business groups. Then we evaluate the impact of exporting and importing activities on non-trading firms’ persistent increase in TFP. The empirical analysis reveals that, exporting firms enhance the productivity of their upstream suppliers, benefiting all non-trading firms regardless of business group affiliation. In contrast, importing firms are found to have a negative effect on the TFP of upstream non-trading firms along with positive horizontal gains from imitation and labour mobility. Furthermore, while export-related productivity gains are driven largely by backward linkages and persist over time, especially among business group–affiliated firms with greater capacity to absorb, retain, and amplify external knowledge, whereas import-related spillovers show no lasting effect.
The second empirical chapter of this thesis investigates how various participation modes in global value chains and their duration influence firm-level productivity. While previous research has been focused on backward GVC participation (importing foreign inputs and exporting finished goods), we adopt a comprehensive approach and categorise firms’ participation in GVCs into backward, forward (exporting inputs used to produce exported items abroad), and dual (importing foreign inputs and exporting semi-finished goods). By also including traditional exporters (exporting final goods), this chapter enables a clear comparison of productivity outcomes across different trade engagement modes. The empirical findings reveal a strong positive relationship between forward GVC participation and firm-level TFP. Notably, duration analysis provides the evidence that sustained forward participation in GVC builds experience and strengthens firms’ absorptive capacity, which raises productivity.
Finally, the third empirical chapter examines the relationship between financial constraints and firms’ survival in GVCs. We construct a multivariate financial constraint index utilising seven key indicators of financial condition, including, firm size, profitability, liquidity, cash flow generation capacity, solvency, trade receivables, and debt repayment capacity. Empirical results indicate that firms with greater financial constraints have a significantly higher likelihood of exiting global value chains, highlighting the essential role of financial resilience in maintaining long-term participation in GVCs.