Inter-industry Total Factor Productivity Spillovers in India

It is often argued that the positive effects of policies or institutional reforms on the innovation and productivity of firms are amplified by positive spillovers to other firms. In this paper, we use a comprehensive dataset on Indian manufacturing firms and employ spatial econometric techniques to empirically estimate the strength of inter-firm Total Factor Productivity (TFP) spillovers. To address endogeneity concerns, we use tariff reductions during the Indian period of trade liberalization as an exogenous source of variation in TFP (following Topalova & Khandelwal 2011). We focus on three possible channels, namely observation, labor mobility and intermediate input use. We find no systematic evidence in support of TFP spillovers across Indian manufacturing firms.