The Global Trading and Financial Systems: Multilateralism of the World Trade Organization versus Regionalism: Phase II
T. N. Srinivasan[1] and Vani Archana[2]
1. Introduction
In Phase I of the project, which used secondary data, examined the impact of Preferential and Regional Trade agreements (PTA/RTAs) on India’s trade flows. It found in its first part on aggregate bilateral trade flows that the overall effects of PTAs and RTAs on India are largely deleterious for India. Its second part on firm-level data examined the factors that influence the decision of Indian firms to participate in export markets. It showed that several different characteristics of firms (such as their size, productivity, profitability) are relevant besides level barriers export markets.
In Phase II we look further into the constraints and incentives on participation in exports based on primary data from a sample of firms. The survey of firms had broad objectives. Besides exploring factors that could influence export capabilities of a wide spectrum of manufacturing industry in India, the survey also throws light on incentives and constraints on the firms in entering export markets. It also helps to break new ground in analysing India’s trade liberalisation from a micro perspective.
The survey addresses issues such as the influence of ownership (e.g. domestic and foreign) and shareholding (e.g. private and government) status of the firms on their export performance. It also deals with other factors related to finance, internal costs infrastructure (physical, social and financial) constraints, technology, government regulations, labour relations, government incentives and international barriers (tariffs and others).
The survey was designed to provide critical statistical inputs from responses of firms to the survey questionnaire. The sample size is 400 firms in India, in different locations in all regions, north, south, east and west of the country and by selected industry segments. To ensure a reasonable representation of firms from each manufacturing sector, we selected our sample firms using industry as strata. The number of firms from each industry-(stratum) was roughly proportional to the relative shares of the industry in the manufacturing exports of the country. The field operations of the survey were centred at Delhi and other areas of National Capital Region in the North; Mumbai, Pune and Ahmedabad from West; Kolkata in the East; and Chennai and Bangalore in the South. The chosen firms were not all located at each centre of field operations but in several locations around the centres and thus covered the whole country. Out of the 400 firms surveyed, nearly three-fifths (56%) turned out to be private limited companies, followed by partnership and sole proprietorship firms at 12% each. Public limited companies constituted only one-fifth of the total sample, of which unlisted public limited companies outnumbered the listed public limited companies by 2%. In terms of export performance of the industries and the establishments covered, private limited companies appear to be relatively better placed. The number and proportion of responding firms is shown in Table1 below.
Table 1: Distribution of Respondent Firms
Industry Segment / Respondents / ProportionMinerals and Fuels / 81 / 20.25
Gems and Jewellery / 85 / 21.25
Textiles / 95 / 23.75
Metals / 39 / 9.75
Machinery / 39 / 9.75
Chemicals / 28 / 7
Plastics / 5 / 1.25
Pharmaceuticals / 7 / 1.75
Leather and products / 21 / 5.25
Total / 400 / 100
2. Descriptive Analysis of Survey Data
The analysis is from the perspectives of industry and export performance, since our objective is to assess the significance of several factors on export activities. Export performance indicator designated export intensity, is measured as the share of exports in total sales turnover of each firm, and expressed in percentage terms. Its range (0%-100%) is grouped into four: below 10%, 11% to 25%, 26% to 50% and over 50%.
2.1. Firm Characteristics
2.1. i. Ownership Pattern of the Firms
Table 2: Indian private ownership
Export Intensity→Private stake ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
No stake / 4 / 2 / 0 / 1
1-30% / 0
31-50% / 1 / 0 / 1
51-70% / 1 / 3 / 2
Over 70% / 96 / 96 / 97 / 100 / 96
Table 2 shows that the stakes of Indian private investors in the surveyed firms are very high, with 96% of firms reporting private stakes over 70%. In pharmaceuticals, leather, textile and plastics, Indian private investors hold high stakes (over 70%). In others it is even higher in the range of 92-98%. Only 4% exporting firms across all intensities had private stakes below 70%.
Table 3: Government Ownership
Export Intensity→Government stake ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
No stake / 98 / 96 / 97 / 98 / 97
1-30% / 3 / 2 / 2
Over 70% / 2 / 2 / 1
Table 3 shows that in only 1% of firms government the stake of government exceeded 70% and in 90% of firms government had no stake It turned out( data not presented here) that in pharmaceuticals, leather, textiles and plastics, there was no government ownership. Firms with export intensity of over 50% (except in metals) had less than 10% government stakes.
Table 4: Foreign Ownership
Export Intensity→Foreign stake ↓ / Below 10% / 11-25% / 26-50% / Over 50% / Total
No stake / 96 / 97 / 94 / 100 / 95
1-30% / 2 / 2 / 5 / 3
31-50% / 1 / 1 / 1
51-70% / 0
Over 70% / 2 / 1
Only 5% of the surveyed firms had some foreign ownership, with 3% having less than 30%. There was no foreign ownership in pharmaceuticals, leather and plastics. Given that there was little foreign ownership in our entire sample it is no surprise the same is true across all export intensities.
2.1. ii. Employment Structure
Table 5: Employment (Percent of firms)
Industry Segment / Employment ranges<30 / 31-50 / 51-100 / >100
Minerals & fuels / - / 6 / 41 / 53
Gems & Jewellery / 8 / 48 / 38 / 6
Metals / 3 / 3 / 45 / 50
Machinery / 5 / 15 / 48 / 33
Chemicals / 4 / 18 / 50 / 29
Pharmaceuticals / - / - / 80 / 20
Leather / 5 / 10 / 57 / 29
Textiles / - / 6 / 34 / 60
Plastics / - / - / 100 / -
All / 3 / 16 / 42 / 39
Only a very low share (3%) of firms had less than 30 employees, with 81% of firms employing at least 50. Thus in terms of employment most of our firms are relatively large. As is well known, most firms in Indian industry are small firms – since our choice of firms is not a random sample of the universe of firms in each industry but is a purposive one with a focus on exports, it is not surprising that most of the firms in our sample are large. All respondents in plastics and 80% in the pharmaceutical segments reported their employee strength to be between 51 to 100. More than half of the firms in minerals and fuels, metals and textiles segments have each reported more than 100 employees per firm.
Table 6: Employment and Export Intensity
Export Intensity →Employment ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
< 30 / 2 / 2 / 3 / 2 / 3
31-50 / 12 / 13 / 17 / 20 / 16
51-100 / 34 / 49 / 44 / 30 / 41
> 100 / 52 / 35 / 36 / 48 / 40
All / 100 / 100 / 100 / 100 / 100
The distribution of firms by employee strength seems similar across all export intensities.
2.1. iii. Age of Firms
Table 7: Age and Export Intensity
Export Intensity % / Below 10% / 11-25% / 26-50% / Over 50% / AllVery Old (before 1950) / 4 / 4 / 4 / 3 / 4
Fairly Old (1950-2000) / 74 / 87 / 79 / 83 / 81
New Establishment (after 2000) / 22 / 9 / 17 / 14 / 15
Total / 100 / 100 / 100 / 100
A large proportion of firms (81%) are less than 50 years old. Only 15% were less than 10 years old and even fewer, 4% were more than 50 years. Export intensity is highest for the few old firms (more than 50 years) across all export intensity categories.
2.1. iv Assets of Firms
Table 8: Distribution of Firms by Total Assets
Total Assets (Rs crore)% of Firms / small ( <10) / medium (10 to 50) / large( >50)
Minerals and fuels / 17 / 27 / 54
Gems and jewellery / 22 / 38 / 45
Metals / 11 / 39 / 45
Machinery / 20 / 38 / 38
Chemicals / 07 / 21 / 68
Pharmaceuticals / - / 20 / 80
Leather / 14 / 29 / 33
Textiles / 16 / 31 / 45
Plastics / - / - / 100
All / 16 / 32 / 48
In terms of their assets of all the firms 16% were small, 32% were medium and 48% were large. All firms in plastics had total assets in excess of Rs 50 crores. Most other segments with this high range of total assets varied from 33% in leather to 54% in minerals and fuels. Two segments, with larger share of firms with assets exceeding Rs. 50 crores, are chemicals (68%) and pharmaceuticals (80%).
Table 9: Firms’ Assets and Export Intensity
Export Intensity % / Below 10% / 11-25% / 26-50% / Over 50% / AllSmall firms (Up to Rs 10cr) / 20 / 19 / 13 / 20 / 16
Medium firms (> Rs 10-50cr) / 22 / 30 / 37 / 23 / 32
Large firms (above Rs 50cr) / 54 / 50 / 44 / 50 / 48
NR (non-respondents) / 4 / 1 / 6 / 7 / 4
Total / 100 / 100 / 100 / 100
In each of the firm export intensity categories individually and over all, larger firms dominate, accounting 44% to 54% of firms.
2.1. v. Technology Introduction and Research and Development Spending
Table 10: Technology Induction and Export Intensity
Export Intensity % / Below 10% / 11-25% / 26-50% / Over 50%Introduced (new technology) / 64 / 78 / 76 / 78
Not Introduced (new technology) / 36 / 22 / 24 / 23
Total / 100 / 100 / 100 / 100
Interestingly more than 75% of the firms reported having introduced new technology within the last 3 years, with the proportion varying from 64% in the lowest export intensity category to78% in the highest. About 9 out of every 10 firms in leather have acquired new technology in last 3 years as compared to 84% in gems & jewellery, 82% in metals and 80% in pharmaceuticals. Firms with newer technology have export intensity over 50% as compared to those with older technology. All firms in mineral & fuels, metals and gems & jewellery have export intensity of more than 50% have acquired new technologies
Table 11: Research and Development (R & D) expenditure and Export Intensity
Export Intensity→R&D to sale ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
Up to 0.2% / 8 / 2 / 6 / 5 / 5
0.2 to 0.5% / 6 / 5 / 1 / 5 / 3
0.5% to 1% / 16 / 9 / 15 / 13 / 14
No Response / 70 / 84 / 78 / 77 / 78
Only 22% of the surveyed firms reported having spent anything on R&D, with 78% not responding. Of the 22% of firms that spent on R & D, large majority of 14% respondents spent between 0.5% and 1% of their sales. Among these were 43% of the firms in leather, 20% in pharmaceuticals and low of 5% in minerals and fuels. In most other industries the proportion of firms varied between 11% and 17%.
2.1. vi. Experience in Exporting
Table 12: Experience and Export Intensity
Export Intensity % / Below 10% / 11-25% / 26-50% / Over 50% / AllShort (Up to 2 years) / 10 / 1 / 4 / 3 / 4
Medium (3 to 5 years) / 20 / 23 / 17 / 5 / 18
Long (over 5 years) / 70 / 76 / 79 / 92 / 78
Total / 100 / 100 / 100 / 100
In each of the export intensity categories (and overall) firms with long exposure over 5 years to foreign markets dominate, ranging from 70% to 92%. 18% of the firms with medium term export experience (3 to 5 years) and 4% with short experience (up to 2 years), have relatively low export intensities.
2.1. vii. Share of Costs and Profits in Sales and Export Intensities
Table 13: Costs and Export Intensity
Export Intensity→Cost to Sale ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
Up to 80% / 44 / 51 / 37 / 28 / 40
>80 to 90% / 2 / 7 / 4 / 5 / 4
>90 to 100 / 16 / 3 / 3 / 10 / 6
>100 / 6 / 21 / 28 / 18 / 23
No Response 32 18 28 39 27
Of the firms that reported their costs, for 40% costs did not exceed 80% of sales revenue. This implies that these firms made a profit of more than 20% on sales. Another 4% of firms reported total cost in the range of 80% - 90% of sales and 6% in the range of 90% - 100%. Of the firms which made a profit, the proportion of firms which had export intensity of 11% to 25% was as high as 51%.
Table 14: Net Profit after Tax (PAT) and Export Intensity
Export Intensity→PAT to sale ↓ / Below 10% / 11-25% / 26-50% / Over 50% / All
Up to 2% / 12 / 5 / 8 / 8 / 8
> 2 to 5% / 8 / 5 / 5 / 5 / 5
>5% / 28 / 20 / 22 / 32 / 24
No Response / 52 / 70 / 65 / 55 / 63
The 37% responding firms nearly 24% secured a net profit less tax in excess of 5% of sales. 8% have realized less than 2% of their sales as net profit after tax. 5% of the firms have achieved net profit after tax in a range of 2% to 5% of sales. 80% of the firms in pharmaceuticals, 31% in textiles have reported net profit (after tax) to sales in excess of 5%.
2. 2. Incentives
2.1. i. Export Promotion Subsidy Schemes
Table 15: Export Promotion Subsidy and Export Intensity
Export Intensity % / Below 10% / 11-25% / 26-50% / Over 50% / AllReceivers / 86 / 81 / 70 / 85 / 76
Non Receivers / 14 / 19 / 30 / 15 / 24
Total / 100 / 100 / 100 / 100 / 100
76% of the firms surveyed received subsidies under export promotion schemes. Firms receiving subsidy in various industry segments performed well, with export intensities in the range of 26 to 50%, including 78% of firms in gems & jewellery 75% in pharmaceuticals and 65% in leather. In other industry segments the ratio was around 50%.