How do pro-market reforms impact firm profitability? The case of India under reform

A number of developing countries have enacted pro-market reforms to transform their economies from socialist to market economies. These reforms bring sweeping changes in the economic and competitive landscapes of these countries, with significant consequences for firm performance. We integrate Douglass North's theory of institutional change with gains from governing the economy through market forces relative to government control to theorize a U-shaped relationship between pro-market reforms and firm profitability. We also theorize that the U-shaped relationship will be shallower for foreign firms and top business group firms relative to independent firms. We test and find support for the theorized relationships in a large sample of 122,534 observations taken across 18,591 firms in India, as it has implemented pro-market reforms.

[1]  C. Bartlett,et al.  The Multinational Corporation as an Interorganizational Network , 1990 .

[2]  L. Bhole.  Recent Changes in the Theory and Policy of Cash Reserves Ratio and Statutory Liquidity Ratio: A Critical Appraisal , 1993 .

[3]  Terence Tsai,et al.  Strategy in emerging economies and the theory of the firm , 2014, Asia Pacific Journal of Management.

[4]  Nandini Gupta.  Partial Privatization and Firm Performance , 2002 .

[5]  Intellectual origins of Indian economic reform: A review of Jagdish Bhagwati's India in transition: Freeing the economy (1993) , 1994 .

[6]  A. Amsden.  Emerging Multinationals from Emerging Markets: Does firm ownership matter? POEs vs. FOEs in the developing world , 2009 .

[7]  Aya S. Chacar,et al.  Bringing institutions into performance persistence research: Exploring the impact of product, financial, and labor market institutions , 2010 .

[8]  E. Phelps,et al.  Needed mechanisms of corporate governance and finance in Eastern-Europe' , 1993 .

[9]  Nitin Nohria,et al.  Motivación de los empleados: un poderoso modelo nuevo , 2008 .

[10]  Shalendra D. Sharma.  Development and Democracy in India , 1999 .

[11]  T. Khanna,et al.  Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups , 2000 .

[12]  Yingyi Qian,et al.  How Reform Worked in China , 2002 .

[13]  Joe Studwell,et al.  The China Dream: The Quest for the Last Great Untapped Market on Earth , 2002 .

[14]  David B. Montgomery,et al.  Resource commitment, entry timing, and market performance of foreign direct investments in emerging economies: The case of Japanese international joint ventures in China , 2000 .

[15]  Anil Nair,et al.  Localized advantage in a global economy: The case of Bangalore , 2007 .

[16]  Jayanth R. Varma,et al.  Securities Scam: Genesis, Mechanics, and Impact , 1993 .

[17]  Yadong Luo,et al.  Timing of Investment and International Expansion Performance in China , 1998 .

[18]  D. Ahlstrom.  Innovation and Growth: How Business Contributes to Society , 2010 .

[19]  Edward Levitas,et al.  Special Issue on Corporate Transformation in the People's Republic of China: The Institutional Effects on Strategic Alliance Partner Selection in Transition Economies: China vs. Russia , 2004, Organ. Sci..

[20]  Garry D. Bruton,et al.  Institutional differences and the development of entrepreneurial ventures: A comparison of the venture capital industries in Latin America and Asia , 2009 .

[21]  Sheilagh Ogilvie.  Guilds, Efficiency, and Social Capital: Evidence from German Proto-Industry , 2002 .

[22]  Bharat Ramaswami,et al.  Economic Liberalization and Indian Economic Growth: What's the Evidence? , 2011 .

[23]  D. North.  Institutions, Institutional Change and Economic Performance: Economic performance , 1990 .

[24]  Mauro F. Guillén,et al.  Business Groups in Emerging Economies: A Resource-Based View , 2000 .

[25]  B. Elango,et al.  Response strategies of local firms to import competition in emerging markets , 2013 .

[26]  Mike W. Peng,et al.  The Growth of the Firm in Planned Economies in Transition: Institutions, Organizations, and Strategic Choice , 1996 .

[27]  B. Elango,et al.  Building capabilities for international operations through networks: a study of Indian firms , 2007 .

[28]  G. Bruton,et al.  What do firms from transition economies want from their strategic alliance partners , 2011 .

[29]  Montek S. Ahluwalia,et al.  Economic Reforms in India Since 1991: Has Gradualism Worked? , 2002 .

[30]  Joel Mokyr,et al.  The Gifts of Athena: Historical Origins of the Knowledge Economy , 2002 .

[31]  Sunny Li Sun,et al.  The Institution-Based View as a Third Leg for a Strategy Tripod. , 2009 .

[32]  C. Prahalad,et al.  The end of corporate imperialism. , 2008, Harvard business review.

[33]  W. Arthur,et al.  Increasing returns and the new world of business. , 1996, Harvard business review.

[34]  D. Ahlstrom,et al.  Board turnover in Taiwan’s public firms: An empirical study , 2013 .

[35]  A. Ramanna.  Interest Groups and Patent Reform in India , 2003 .

[36]  I. Mitroff,et al.  Preparing for evil. , 2003, Harvard business review.

[37]  Toru Yoshikawa,et al.  Strategic investments in Japanese corporations: Do foreign portfolio owners foster underinvestment or appropriate investment? , 2006 .

[38]  Murali D. R. Chari,et al.  Sustaining superior performance in an emerging economy: an empirical test in the Indian context , 2012 .

[39]  Stephen Nickell,et al.  Uncertainty and Lags in the Investment Decisions of Firms , 1977 .

[40]  Mike W. Peng.  Institutional Transitions and Strategic Choices , 2003 .

[41]  R. Nelson,et al.  Making Sense of Institutions as a Factor Shaping Economic Performance (Spanish Version) , 2001 .

[42]  Jeffrey M. Wooldridge,et al.  Solutions Manual and Supplementary Materials for Econometric Analysis of Cross Section and Panel Data , 2003 .

[43]  Robert E. Hoskisson,et al.  Strategy in Emerging Economies , 2000 .

[44]  Stanley Fischer,et al.  The Process of Socialist Economic Transformation , 1991 .

[45]  A. Panagariya,et al.  India: The Emerging Giant , 2008 .

[46]  Yingyi Qian,et al.  Reforming corporate governance and finance in China , 1994 .

[47]  J. Kornai.  The Hungarian Reform Process: Visions, Hopes, and Reality , 1986 .

[48]  Yi Jiang,et al.  An institution-based view of international business strategy: a focus on emerging economies , 2008 .

[49]  S. West,et al.  Multiple Regression: Testing and Interpreting Interactions. , 1994 .

[50]  R. Nelson.  What enables rapid economic progress: What are the needed institutions , 2008 .

[51]  Shaomin Li,et al.  Market liberalization and firm performance during China's economic transition , 2006 .

[52]  Donald N. McCloskey.  Tunzelmann, Schumpeter, and the Hockey Stick , 2013 .

[53]  Mike W. Peng,et al.  Strategy Research in Emerging Economies: Challenging the Conventional Wisdom , 2005 .

[54]  R. Cass.  The Rule of Law in America , 2001 .

[55]  George S. Yip.  Diversification entry: Internal development versus acquisition , 1982 .

[56]  Paul W. Beamish,et al.  Multinational networks during times of economic crisis versus stability , 2008 .

[57]  Franklin Allen,et al.  Strategic management and financial markets , 1993 .

[58]  Joel Mokyr,et al.  The Lever of Riches: Technological Creativity and Economic Progress. , 1991 .

[59]  J. Farley,et al.  Determinants of Financial Performance: A Meta-Analysis , 1990 .

[60]  Tarun Khanna,et al.  Emerging Market Business Groups, Foreign Investors, and Corporate Governance , 1999 .

[61]  R. Ramamurti.  A Multilevel Model of Privatization in Emerging Economies , 2000 .

[62]  William J. Baumol,et al.  Convergence of Productivity: Cross-National Studies and Historical Evidence , 1994 .

[63]  T. Khanna,et al.  The Future of Business Groups in Emerging Markets: Long Run Evidence from Chile , 1998 .

[64]  Peter C. Murrell,et al.  What is Shock Therapy? What Did it Do in Poland and Russia? , 1993 .

[65]  Krishna G. Palepu,et al.  Policy Shocks, Market Intermediaries, and Corporate Strategy: 'The Evolution of Business Groups in Chile and India' , 1998 .

[66]  Robert E. Hoskisson,et al.  Does market-oriented institutional change in an emerging economy make business-group-affiliated multinationals perform better? An institution-based view , 2010 .

[67]  Nandini Gupta,et al.  Incumbents and protectionism: The political economy of foreign entry liberalization , 2008 .

[68]  S. Rangan,et al.  The problem of control and the role of home–host ties in explaining multinationals' foreign operations, competitiveness, and performance , 2011 .

[69]  Malcolm Gillis,et al.  Economics of Development , 1984 .

[70]  M. N. Young,et al.  Managing the Institutional Environment: Challenges for Foreign Firms in Post WTO China , 2003 .

[71]  Mike W. Peng,et al.  Managerial Ties and Firm Performance in a Transition Economy: The Nature of a Micro-Macro Link , 2000 .

[72]  G. Nicodème,et al.  Product Market Reforms and Productivity: A Review of the Theoretical and Empirical Literature on the Transmission Channels , 2007 .

[73]  The Regulation of Labor , 2003 .

[74]  Alvaro Cuervo‐Cazurra,et al.  Promarket Reforms and Firm profitability in Developing Countries , 2009 .

[75]  John Van Reenen,et al.  Why Do Management Practices Differ across Firms and Countries , 2010 .

[76]  Sheilagh Ogilvie.  Institutions and European Trade: Merchant Guilds, 1000-1800 , 2011 .

[77]  K. Manikandan,et al.  Beyond institutional voids: Business groups, incomplete markets, and organizational form , 2015 .

[78]  D. C. Michael,et al.  How Local Companies Keep Multinationals at bay , 2008 .

[79]  Usha C. V. Haley.  Assessing and controlling business risks in China , 2003 .

[80]  A. Shleifer,et al.  Legal Determinants of External Finance , 1997 .

[81]  Robert J. Strom,et al.  Entrepreneurship and economic growth , 2007 .

[82]  F. Hayek.  The economic nature of the firm: The use of knowledge in society , 1945 .

[83]  W. Naudé.  Entrepreneurship is not a Binding Constraint on Growth and Development in the Poorest Countries , 2011 .