Chinese Import Competition in India: A Firm-Level Analysis of Industrial Activity and Pollution

Abstract

Over the past two decades, China has grown to become the world’s largest exporter (The World Bank, 2015). The impact of this sudden increase in Chinese imports is found to vary widely in literature. On the one hand, rising Chinese import competition may increase unemployment, reduce wages, compress sales, and hurt growth (Acemoglu, Autor, Dorn, Hanson, & Price, 2015; Autor, Dorn, & Hanson, 2013; Utar & Ruiz, 2013). On the other hand, it may increase innovation, enhance productivity, and induce skillupgrading of the workforce (Bloom, Draca, & Reenen, 2015; Bugamelli, Fabiani, & Sette, 2010; Mion & Zhu, 2013). Similarly, the environmental implications of increased global trade are uncertain: there may be a harmful “scale effect” that increases the volume of pollution, and a beneficial “technique” effect that improves efficiency and decreases pollution (Cole & Elliott, 2003; Johnson, 1955). This thesis fills a gap in the literature surrounding the economic and environmental impacts of increased Chinese import competition in India. It uses an extensive database of over 30,000 Indian firms to analyze the precise effect of increased Chinese import competition on firm profitability, entry rates and exit rates. It then applies sector-specific pollution intensity data from the World Bank’s Industrial Pollution Projection System (IPPS) to assess the impact of Chinese import competition on Indian manufacturing pollution emissions. I find that Chinese import competition has significantly hurt the profitability and altered the exit rates of Indian-owned manufacturing firms. Both Bombay Stock Exchange (BSE) and non-BSE manufacturing firms are hurt, but at different times: BSE firms are affected in earlier periods and non-BSE firms in later periods. This occurs because (1) BSE firms tend to be more capital intensive and inefficient, and (2) real effective exchange rate appreciation of the rupee from 1996 to 2001 makes BSE firms become more vulnerable to the negative effects of Chinese import competition while non- BSE firms temporarily benefit from cheaper imported inputs. Throughout this period, firms with high market share and small size are immune to the impact of Chinese import competition. Both firms that suffered profitability declines and firms that exited because of Chinese import competition have higher air pollution intensities than unaffected firms. This suggests that increased Chinese import competition has hurt Indian manufacturing firms, but a decline in manufacturing output has reduced Indian air pollution. However, as Chinese import competition may enhance the overall productivity of the Indian manufacturing sector in the long run, any beneficial environmental effect resulting from Chinese import competition may only be temporary.