Total factor productivity spillovers from trade reforms in India

It is often argued that the positive effects of policies or institutional reforms on the productivity of firms are amplified by positive spillovers to other firms. In this paper, we use a comprehensive dataset of Indian manufacturing firms and employ spatial econometric techniques to estimate the strength of inter‐firm total factor productivity (TFP) spillovers within India following trade reforms. We use externally imposed tariff reductions as an exogenous source of variation in TFP (following Topalova and Khandelwal 2011) and test for spillovers arising from observation, labour mobility and intermediate input use. We find no evidence of TFP spillovers between Indian manufacturing firms after trade liberalization on average. However, initially productive firms seem to benefit from TFP increases in other highly productive firms located in their vicinity.