4tg
INSTABILITIES IN MARKET CONCENTRATION:
AN EMPIRICAL INVESTIGATION IN
INDIAN MANUFACTURING SECTOR
Pulak Mishra and BhagirathBehera
Thepaper investigatesinstabilities in market concentration in Indian manufacturing sector in
the post-liberalisation era. The paper applies time-series unit root test to examine instabilities in
market concentration and random effects model to identify the determinants of the nature of time
path of market concentration in the sector. The paper finds that there are instabilities in market
concentration in all the major industry groups of Indian manufacturing sector. It is also found that
while size of the market, advertising, distribution and R&D related efforts and industry risks have
positive impact on market concentration, import competition, export performance and marketing
efforts have negative influence on the same. The combined impact of a unit change in the variables
with positive impact appears to be much higher than that in the variables with negative impact. This
causes the time-series of market concentration to become explosive, i.e., deviating ctwayfrom
equilibrium. Hence, in order to ensuregreater competitionin the marketplace,it is necessaryto
control for restrictive businesspractices by thefirms, and the risks and uncertainties of operation
in the market. It is also necessaryto integrate intellectual property lqw with competition law and
encourage international trade. The policies and regulatory structures should have necessary
provisions in this regard.
JEL Classification:Ll l, L25
Key words: market instability, concentration,manufacturing sector, India
I. INTRODUCTION
The dynamiccompetitionis generallyseenas
technology driven rivalry for marketsrather than
price and output-based competition within
markets [Schumpeter,1950]. Unlike the staric
model of competition where technology and
consumerdemand is given, and price (output)
becomesthe firm's main, if not its only, choice
variable, in reality, firms are engaged in a
continuing dynamic competitive process,
constantlycreating and adopting new products
and processesin order to gain a competitive
advantage over their rivals IKirzner, 1913;
Shackle,19711.That is why with the increased
pace of innovation since the 1980s shortening
technology and product lifecycles, there is
increased dynamic
competition among
businesses,
especially,
within
The literature on competition is basedon two
predominant views, viz., the static and the
dynamic view of competition. The static view
originatesfrom the works of Adam Smith and
AugustinCournotand seescompetitionasa state
of af;fairsthat results in optimum allocation of
resources for a given set of tastes and
technological opportunities [Mueller, 1990a;
Baldwin, 19981Thisstaticview of competitionis
basedon the assumptionof stationarystate.But,
in the long-run with innovationsresultingin new
products and processesand thereby in new
marketsand prices,if entry into and exit from the
industry are free, disequilibrium in the
marketplace is very likely [Mueller, 1990b], technology-intensive
industries[Bettis& Hitt,
makingcompetitiondynamic with instabilitiesin 1995,Pp.7-20;Nault& Vandenbosch,
1996,Pp.
nature.342-358;Evans& Schmalensee,
20011.This
Pulak Mishra and Bhagirath Behera are Assistant Professor in Deparlment of Humanities and Social Sciences,Indian
InstituteofTechnology, Kharagpur -721 302.
e-mail: [email protected];
[email protected]
The authors are thankful to the anonymous referees for their useful comments and suggestionson the paper that have
helped in-revising the paper immensely. The authors are also grateful to ProfessorK. Pushpangadanand Prof6sdorN. Shanta
for providing and accessto their works and views on the issues.
420
IOURNALOF INDIANSCHOOLOF POLITICALECONOMY
TULY.SEPT
2M7
means that competition should be viewed as a related deregulatory policy measures.The basic
dynamic processof rivalry [Vickers, 1995],as it objectiveof thesepolicy changesis to facilitate
is more intuitive and much closerto today's view greater competition required for efficient
of competition than is the notion of static functioningofthe marketforces(ratherthanstate
competition. As Hayek (1948) argued, direction) in determining production and
"competitionis by its naturea dynamic process distribution of goods and services.While the
whoseessentialcharacteristics
areassumedaway removal of entry and licensing barriers are
by the assumptionsunderlying static analysis". expected to expose the domestic firms to
Therefore, in understandingntarket competition internationalcompetitionand to compel them to
properly, dynamic approachshould be favoured improve their efficiency and productivity by
over static analysis,though staticcompetitionis introducingnew productsand processes,
reforms
frequentlyprefenedby the antitrusteconomists.2 in trade policies are aimed at facilitating import
of materials, components and technology, in
However, although dynamic competition is additionto bringing in import competitionin the
largely associated with generation of new domesticmarketplace.s
productsandprocesses,
othernon-pricestrategies
like advertising, business restructuring and
Interestingly,the increasein policy induced
consolidationandstrategicalliances,andchanges competitive pressureshas forced the firms to
in public policies can affect its nature adopta variety of strategiesto cope with the new
significantly,particularly,when the playersin the environment.
Underthenewbusiness
conditions,
market strive to influence competition the domestic firms are increasingly using the
strategically. For example, advertising can route of mergers, acquisitions and other
restrict market competition by differentiating restructuring activities to strengthen their
products, by establishingbrand loyalty among positionin themarketplaceandgrow. The foreign
consumers,and by raising the costsof entry. On firms have also made attempt to enter into and
the other hand,it can also be a sourceof valuable raise control in Indian industry.6For instance,
information to consumersand therebymay lead Coca-Colawhile re-enteringthe country in 1993
to erosion in the market shares of individual acquired Parle, the largest player in the market
sellers.Similarly, mergers and acquisitionscan with several well-establishedbrands to have a
raisemonopoly power of the firms. Besides,such head start over the rival Pepsi. Similarly the
strategiescan alsoresultin greaterefficiencyand MNCs like Lafarge and Saint Gobain also used
hence lower averagecosts for the participating the modeof acquisitionto setup their basesin the
firms and thereby can lead to greater market country.'
Such restructuring exercises are
concentration.However, it is also possiblethat supportedby strategicalliances/tie-ups
andjoint
increase in efficiency through mergers and ventures of different types ranging from
acquisitionsraisescompetitivenessof the firms, manufacturing, distribution, marketing to
especiallythe smaller ohes, and henceprevents technology licensing, technology exchanges,
increasein market concentration. Thus, when R&D, etc. As a result, the degreeof inter-firm
dynamic competition is viewed from general rivalry hasincreased.
equilibrium perspective,operation of various
forces with diverse impacts may lead to
Hence, since 1991 two oppositeforces have
instabilitiesin marketcompetition.r
beenoperatingin Indian corporatesector.While
the policy changeshave removed the structural
In India, initiation of large-scaleliberalisation entry and exit barriers and provided the firms
processsinceJuly1991hasled to many important enough flexibility in respecrof entry and exit
changesin thecompetitionpolicy,oaccompanied decisionsto bring in greatercompetition in the
by a number of industries,investmentand trade marketplace,the resultantstrategiesby the firms
voL. 19NO.3
IN STABI LITI ESI N MARKET CONCENTRAT
I ON
421
to improve their competitivenessand strengthen II. INSTABILITIESIN MARKETCONCENTRATION
. A THEORETICALOVERVIEW
market position are likely to push market
concentrationupward.Dependingon the relative
The possibility of instabilities in market
strengthsof these forces from time to time the
concentrationcanvery well be explainedwith the
pathof marketconcentration
may be oscillatory.8help of the Structure-Conduct-Performance
This means that in a liberalising economy like (SCP)paradigm,the predominantframework
and
India the dynamic versionis more appropriatein possiblythe most testedhypotheses
of empirical
understandingcompetition [Pushpangadanand researchin industrialeconomics.The traditional
Shanta,2008, Pp. 103-1231.This is so because SCPparadigm,basedon theearlywork of Edward
the dynamic version can adequatelycapturethe Mason
[939, Pp. 6l-74] and developedfurther
instabilities in market concentrationthat have by Bain
[1959], postulatesa unidirectional
important implications for long-term policy relationshipbetween market structure,conduct
formulation.
and performance. The basic idea of this
Although there exist a numberof studiesthat
arebasedon the dynamicversionof competition,
[e.g.,Mueller, 1990b;Kambhampati,1995,Pp.
353-361; Yurtoglu, 2004, Pp. 615-625;Glen et
al., 2003, Pp. F465-f484; Mishra, 2008, Pp.
74-81; Pushpangadanand Shanta,2008, Pp.
103-1231,'systematictesting of instabilities in
market concentrationis largely ignored. In this
perspective,the objective of this paper is to
examinethe instabilityin marketconcentrationin
Indian manufacturingsector in the post-reform
eraandthefactorsresponsiblefor thesame,While
the unit root test approachpermits one to verify
the prevalence of instabilities in the market
concentrationacross different industries,r0the
two-stageleastsquaresmethodor theGeneralised
Least Squaresmethod helps in determiningthe
factorsthat influencethe natureof the time path.
relationship is that the structure of an industry
directs conducts of the firms which in turn
influencetheirperformance.
Thus,Bain's version
of SCP paradigm assumesthe causationto run
from structureto conductand then to economic
performance.With high levels of concentration
firms exhibit market power and charge
monopolistic prices and these prices, in turn,
affect their performance.
Although the original framework was
criticisedby theeconomictheoristson theground
that SCP analysesare purely empirical in nature
and they lack rigorous foundation in economic
theory[Davieset al., 1989]andthat the modelis
too deterministicto understandthe functioningof
imperfect markets [Schererand Ross, 1990], it
has been applied extensively to different
industriesundervariouseconomicenvironment.
Apparent success of the SCP approach in
The rest of the paper is organisedas follows: explainingthe reality stimulatedinterestsin the
SectionII presentsthe theoreticalunderstanding creation of a more robust theorv of industrial
of instability in market concentration. The organisation.
structureof themarkets,conductsof thefirms and
their performanceare discussedin Section III.
The successivedevelopmentsin the literature
SectionIV presentsthe methodologyof the time since the 1970s have abandoned the
seriesunit root test and the data source,and the unidirectionalflow of causationfundamentalto
empirical findings on nature of time path of theSCPframeworkandhaverecognisedtwo-way
market concentration. Section V attempts to causalities between structure and conduct,
identify thedeterminantsof marketconcentration betweenconduct and performanceand between
to understandthepossiblereasonsfor instabilities structure and performance [Tirole, 1988]. For
in market concentration,SectionVI summarises example, strategieslike merger, acquisitions,
the findings and makes necessary policy advertising, creation and adoption of new
suggestions.
technologycanchangethestructureofthe market.
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
Application of any of such strategies,in turn, may
depend on financial performanceof the firms.
Similarly, improved performancein the form of
higher profitability can changemarket structure
by encouragingthe existing firms to grow or the
new firms to enterinto the market.Thus, not only
industry structureinfluencesfirms' conductand
their performance,it can also be influencedby
conduct or performance. A large body of
literature,[e.g., Geroskl, 1982, Pp. 145-158;
Evanset al.,1993,Pp. 13-201existsthat accounts
for such possibleendogeneitiesin econometric
analysis.
JULY.SEPT
2OO7
Delorme et. al., 2002, Pp. 13-201 to take into
accountthe multiplicity of causalitybetweenthe
different variables in the SCP framework.
Further, the relationshipsmay not necessarily
in nature[Kambhampati,1996].
be instantaneous
Instead,laggedrelationshipsamongstmany of the
constituentvariables
arevery likely. Forexample,
the structureof a marketmay be influencedby
many of these variablesover a period of time
making the relationshipdynamic in nature.As
Kambhampati[1996]pointsout,laggedconduct
and both lagged and curuentperformancecan
affect marketconcentration.Besides,the actions
of incumbentscan affect market structuremore
quickly than the potential entrantswho are in the
processofraising capitalto financetheir decision
to enter and produce. Therefore, modeling
structure- conduct- performance- policy
relationship also requires application of an
appropriate lag structure to understand the
relationshipsmore precisely.
Another important developmentin the modern
SCP paradigm is inclusion of public policies
relating to taxes, subsidies,internationaltrade,
investment, etc., that can have significant
influenceon market structure[Schererand Ross,
19901.The antitrustpolicy in the USA and the
multitude of regulationsobservedin most of the
European countries can be seen as devices to
Such simultaneous lagged relationships
influence
industry
structure, conduct,
market structure,firms' conduct and
amongst
performance and consumer welfare [Utton,
performance
and policies of the government
l970l.rr
Such developments propound
SCP
framework a conceptuallymore
makes
the
multidirectional
structure-conductsuitable
tool
of
analysing
the dynamicsof market
performance- policy relationships as it is
competition.
However,
on many occasion.
envisagedin Figure l.
non-availabilityof necessarydata for different
periods can place restrictions on using lag
Hence, in the new SCP framework, market
structure. Under
such
circumstances,
structureis no longer assumedto be exogenous.
comprehensivepanel datasetof firms or that of
Instead,to a large extent,it is influencedby the
industriesmay be relevant as well. This is so
basic conditions relating to demandand supply
becausethe time seriescomponentsof paneldata
that in turn dependon structureof the marketand
allow taking into account the dynamic
conductsby the firms. It may also be influenced structure-conduct-performance-policy
considerablyby strategicbehaviourof the firms, relationshipsacrossindustriesover the period of
their performancesand policy changesby the time.
government. This makes market structure
'endogenous',
III. STRUCTURE,
CONDUCTAND
and thereby the SCP literatureto
PERFORMANCE
IN MAJORINDUSTRIES
be headedtowardsuseof simultaneousstructural
equationmodels, [e.g., Stricklandand Weiss,
As discussedin the previous section of the
1 9 7 6 ,P p . I 1 0 9 - 1l 2 l ; G a b e l ,1 9 7 9 , P p .8 9 - 1 0 4 ; paper,
there
exist
multidirectional
Martin, 1979 a,Pp. 639- 47 andI 979b,Pp.47 I - 88; structure-conduct-performance-policy
Connollyand Hirschey,1984,Pp. 682-686;Uri, relationships.
Therefore,analysingthestabilityof
1 9 8 8 ,P p . 1 3 8 3 - 1 4 0 0H
; a y a n d M o n i s , l 9 9 l ; market concentrationrequiresdetailed
voL. t9 No. 3
INSTABILITIESIN MARKET CONCENTMTION
Figurell Structure-Conduct-Performance-Policy
Relationshipo
Supplg
Raw materials
I
I
Technolory
|
Unionisation
Product Durability
Value/Weight
I
I
I
Business Attitude
l,egal framework
I
I
Denand
Price elasticit5r
Substitutes
Rate of growth
Cyclical and
seasonal characters
Purchase method
Marketing type
Market Structure
Number of firms
Extent of product differentiation
Barriers to entry
Cost structures
Import competition
Publtc Poltcy
Conduct
Pricing behaviour
Product strates/ and advertising
Research and development
Plant investment
Legal tactics
Business restructuring
Horizontal integration
Vertjcal integration
Diversification
Performance
Production and allocative efliciency
Price-cost relationship
Profitability
Employment
Equrty
Source:Basedon SchererandRoss(1990)
Ta:ces and subsidies
Invesfuent and trade
related policies
Regulation and control
Pricing
Antitrust provision
Information dissemination
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
JULY-SEPT2OO7
Table l. Market Size of Major Manufacturing
understandingof structural aspectsof the market,
Ihdustries, 199l-2009
firms' strategiestherein and their perforrnance.
The presentsectionof the papermakesan attempt
Market Size (Logarithm of Total
in this direction. In order to understandthe Industry
Sales)
structure of market across industries. three
AVG
AVG
variablesareused,viz., sizeof themarket,growth
AVG
(199r -2000) (2000-2009)(199l -2009)
of sales,Herfindahl-HirschmanIndex (HHI) of
(2)
(3)
(4)
and import intensity.The
marketconcentrationr2
conducts of the firms in the industries are Chemicals
)-/)
).ld
5.47
4.53
4.99
4.76
explained in terms of advertising, marketing, Food Products
4.66
5.04
4.85
distribution, and research and development Machinery
4.72
Metal & Metal Products
5.21
4.97
(R&D) related expenditures.The variableslike Miscellaneous
3.9?
4.35
4.14
profitability, rate of return on capital employed Manufacturing
4.3
4.77
4.54
and export intensity are used to assess Non-metallicMinerals
4.51
Textiles
4;t9
4.65
performanceof the industries.
4.47
TransportEquipment
5.05
4.76
The structure, conduct, performance and
policy relatedissuesare analysedfor eight major
industries, viz., food products, chemicals,
textiles,metal and metal products,non-metallic
minerals,machinery,transportequipmentand
miscellaneousmanufacturingfor the periodfrom
1991-92 to 2008-09. The analysis is based
entirely on secondarydata collected from the
PROWESSdatabaseof theCentrefor Monitoring
Indian Economy (CMIE), Mumbai. Details on
measurement of the variables are siven in
Appendix I.
Structure of the Market:
Table I shows the market size of major
industriesduring 199l-2009. Here, the market
sizeof an industryin a particularyearis measured
in termsof logarithmof total salesin that industry
in that year. It is observedthe market size varies
acrossthe industries.While chemicalshave the
largest market, the size of the market is the
smallestfor miscellaneousproducts.Further,for
all the industriesthe averagesize of the market
during 2000-09 was higher compared to that
during the 1990s. However, neither of these
industrieshas registeredany significant change
in the market size over the last two decades.
Note: AVG - Averase.
CMIE.
Source:Prowess.
But. the market of all the major industries
exceptthat of textileshas grown at a reasonable
rate in the post liberalisation era though the
averagerate of growth is relatively higher in the
industries like chemicals, metal and metal
products, and transportequipment (Table 2).13
But, what is more important,perhaps,is that all
the industries,exceptmetal and metal products,
have recorded a lower rate of growth during
2000-2009comparedto that during l99l-2000.
Table 2. Growth of Market of Major Manufacturing
Industries. l99l-2009
Growthof Market(7o)
Industry
AVG
AVG
AVG
(r 991-2000) (2000-2009)(t 991-2009)
(l)
Chemicals
Food Producs
Machinery
Metal & Metal Products
Miscellaneous
Manufacturing
Non-metallicMinerals
Textiles
TransportEquipment
Note: AVG - Average
Source:Prowess,
CMIE.
(2)
(3)
(4)
).b
6.4
5.7
).)
4.4
4.8
6.8
)-6
J.)
4.7
6.3
6.2
7.4
5.3
2.t
6.0
5.8
4.1
6.7
t.l
).J
).t
4.,
voL. 19NO.3
INSTABILITIESIN MARKET CONCENTMTION
The decline is quite sharp in food products and
textiles.Thus, while the economyas a whole and
manufacturing sector in particular have
experiencedimpressiveratesof growth of output
in the presentdecadevis-d-visthose during the
1990s, market for, (i.e., total sales of) the
manufacturingproductshas expandedat a lower
rate, possibly resulting in excesssupply in the
market.This may have significant bearing with
the currentdownturn in the sector.
425
high in ransport equipment.raFurther, majority
of the industrieshasrecordeda declinein market
concentrationduring I 99 I -2000,but a substantial
increasein the sameduring 2000-09.A number
of the industrieshave experienceda reasonably
high rateof growth of marketconcentrationin the
post-liberalisationera and the rate of growth is
quite substantialfor textiles.However,the rateof
growth of marketconcentrationis very low in the
industrieslike food, metal and transport(Table
The degreeofmarket concentrationappearsto
be low in all the industriesexceptchemicalsand
transportation equipment. While
market
concentrationis moderatein chemicals.it is verv
3). Thus, policy reforms might have facilitated
greater competition in the initial years, but
subsequent
strategicresponsesby the firms seem
to have made the market more concentrated.
Table 3. Market Concentratlonln MaJor Manufacturing Industries,1991.2il)9
Industry
Herfi ndahl-Hirschman Index
AVG
AVG
AVG
TGR
TGR
TGR
(1991-2000) (2000-2009) (1991-2009) (1991-2000)(2000-2009)(1991-2009)
(2)
0)
Chenlicals
Food Products
Machinery
Metal & Metal Products
MiscellaneousManufacturing
Non-metallicMinerals
Textiles
Transport Equipment
Note:
Source:
0.086
0.028
0.019
0.084
0.033
0.041
0.009
o.697
(3)
(4)
())
0.131
0.029
0.029
0.080
0.056
0.058
0.022
o;t6l
0.109
0.028
0.024
0.082
0.044
0.050
0.01
5
0;729
4.6
-4.0
-2.0
-8.8
-14.4
-).2
-2.O
9.6
(6)
0\
t-v
5.t
1.3
6.6
1.0
9.3
6.0
13.8
t.2
l 1.5
21.2
21.2
t9.3
23.6
37.9
-5.0
AVG- Average;
TGR- TrendCrowthRate
Prowess,
CMIE.
The extentof competiiionfrom importsvaried import competitionincreasedin all the industries
significantly across the industries in the except chemicalsand textiles and the extent of
posrliberalisationera. While the averageimport increase was quite substantial in machinery,
intensity was the highest in non-metallic non-metallic minerals and miscellaneous
minerals,it wastheleastin textiles.The industries manufacturing(Table 4). Thus, the liberal trade
like chemicals,machineryandfood productsalso policies introduced in the 1990s seem to have
faced a reasonabledegree of competition from brought in greatercompetitionfrom the outside
importsduring this period.Further,the degreeof world in the domesticmarketplace.
426
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
JULY.SEPT2OO7
Table 4. Irnport Cornpetition in Major Manufacturing Industries, 1991-2009
Import Intensity (7o)
Industry
TGR
TGR
TGR
AVG
AVG
AVG
(1991-2000) (2000-2009) (1991-2009) 0991-2000) (2000-2009) 0991-2009)
(2)
(l )
Chemicals
Food Products
Machinery
Metal & Metal Products
MiscellaneousManufacturing
Non-metallicMinerals
Textiles
Transport Equipment
Note:
Source:
2.98
1.03
0.64
0.32
0.l6
t.t2
0.l8
0 . 1I
(3)
1.50
2.13
3 .l 0
0.35
0.75
10.18
0.13
0.23
(4)
114
1.58
L87
0.33
0.45
5.65
0.l6
0.l7
(5)
(6)
("t)
29.9
35.3
30.4
-7.8
20.0
30.3
20.4
t3.2
9.0
5.3
8.1
-0.2
9.8
24.5
14.6
12.0
0.2
9.5
14.0
-0.I
t3;l
19.6
2.1
9.3
AVG - Average;TGR - Trend Growth Rate
Prowess.CMIE.
of the industries in the present decade. As a
when the post-liberalisationera is
consequence,
The firms except thosein food productsareyet consideredtogether,the rate of growth appearsto
to use advertising as an important competitive be negative,thoughmarginally,in chemicals,and
strategy.The relativelyhigh advertisingintensity metal and metal products and only marginally
in food productsmay largely be due to the scope positivefor food productsand machinery(Table
for productdifferentiationtherein.What is more 5). The rate of growth of advertisingintensityfor
important is that while advertisingintensityr5 thetwo decadestogetherappearsto be moderately
increasedat a reasonablyhigh rate in all the high and positive for transport equipment,
industriesexceptmetal and metal productsin the non-metallicminerals,textilesandmiscellaneous
1990s,therateof growth was negativein majority manufacturing.
BusinessStrategies:
Table 5. Advertisinglntensity of Major Manufacturing Industries,199l-2009
AdvertisingIntensity( 7o)
Industry
AVC
AVG
AVG
TGR
TGR
TGR
(1991-2000) (2000-2009) 0991-2009) (1991-2000)(2000-2009) (1991-2009)
(t)
Chernicals
Food Products
Machinery
Metal & Metal Products
MiscellaneousManufacturing
Non-metallicMinerals
Textiles
Transport Equipment
Note:
Source:
(2)
(3)
(4)
(s)
(6)
(7)
0.60
1.78
0.81
0.07
0.75
0.5t
0.36
0.51
0.56
L90
1.03
0.08
1.35
0.79
0.52
0.96
0.58
1.84
oa)
0.07
1.05
0.65
0.44
0.74
6.4
6.8
6.4
-1.6
t2.5
7.2
5.9
I1.0
-5.5
-0.4
l.l
AVG - Average; TGR - Trend Growth Rate
Prowess.CMIE.
11
-5.1
-5.4
8.2
2
3.8
-4.7
-0.7
7.1
A1
A1
5.3
voL. 19NO.3
I NSTAB
I LITI ESI N MARKETCONC ENTRAT
I ON
However,' as compared to advertising, the
firms spend relatively more for creating
marketing
and
distribution
related
complementaryassets.As Table6 shows,average
marketing intensity'" during the entire period of
1991-2009 was higher as compared to the
advertisingintensityduring the sameperiod.The
same can be said in respect of distribution
427
intensityr?as well (Table 7). However, when we
comparemarketingefforts vis-d-vis distribution,
itis observedthatwhile thefirms in food products,
metal and metal products, and non-metallic
minerals spent more for creating distribution
channelsthan marketing efforts for reaching the
consumers,possibly due to the nature of their
products,
Table 6. Marketing Intensity of Major Manufacturing Industries, 1991-2009
Industry
Advertising Intensity (7o)
AVG
AVG
AVG
TCR
TCR
TCR
(1991-2000) (2000-2009) (r991-2009)(1991-2000)(2000-2009) (1991-2009)
Chemicals
Food Products
Machinery
Metal & Metal Products
MiscellaneousManufacturing
Non-metallic Minerals
Textiles
Transport Equipment
Note:
Source:
(2)
(3)
5.95
1.40
1.66
0.82
2.78
1.74
1.96
1.34
1.35
1.97
3.1I
0.82
3.85
1.83
2.03
1.89
(4)
3.65
1.68
2.39
0.82
3.32
1.78
2.N
1.61
(5)
(6)
(7)
-t'7.3
1.7
6.6
4.5
9.6
2.2
1.4
3.0
-2.9
0.1
t.4
-l4.l
-5. I
-1 . 9
-t.7
-0.4
-2.O
3.0
5.9
0.1
3.4
0.5
0.4
2.9
AVG - Average; TGR - Trend Growth Rate
Prowess.CMIE.
Interestingly, all the industries except
chemicalshave recordeda decline in the rate of
growth in marketingintensity during 2000-2009
as compared to that during 199l-2000. More
importantly, barring food products and
machinery,the rest of the industriesexperienced
a negativerate of growth in marketing intensity
in the current decade. The rate of growth of
distributionintensityalsoshowsdeclinein all the
industriesexcluding non-metallic minerals and
transport equipment during this period. This
meansthat both marketing and distribution are
losing their importanceas competitivestrategies
for the firms in most of the industries.
Table 7. Distribution Intensity of Major ManufacturingIndustries,1991-2fi)9
Industry
Distribution Intensity(7o)
AVG
AVG
AVC
TGR
TGR
TGR
(1991-2000) (2000-2009) (1991-2009) (1991-2000) (2000-2009) (1991-2009)
(2)
Chemicals
FoodProducts
Machrnery
Metal & Metal Products
Miscellaneous
Manufacturing
Non-rnetallic
Minerals
Textiles
TransportEquipment
Note:
Source
3.00
z.))
1.06
3.41
2.50
7.25
1.54
114
(3)
2.72
. t . )I
2 . OI
2.27
8.48
t1)
t.37
AVG - Average;TGR - Trend Growth Rate
Prowess,CMIE.
(4)
2.87
2.63
1.29
3.04
2.3r
7.86
1.63
I.J I
(s)
(6)
(7)
1.4
1.0
4.2
-6.8
-0.4
-t.4
0.6
-5.5
0.5
3.3
1.0
2.9
-3.0
o.2
2.1
t.7
0.9
J.9
J.2
5.6
-t.7
5. t
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
428
While the policy reforms aim at bringing in
greatercompetitioninto the marketplace,efforts
towards in-house R&D by the firms across
industriesis a matterof seriousconcern.Not only
is the averageR&D intensity,(i.e.,the percentage
of R&D expenditurein total salesof an industry)
very low acrossthe industries,the industrieslike
JULY-SEPT2OO7
metal and metal products and textiles have also
negative growth in the post
liberalisationera. Further, the rate of growth of
recorded
R&D intensity was lower during 2000-2009as
comparedto that in the 1990sin all the industries
exceptmiscellaneousmanufacturing(Table 8).
Table 8. Innovation Efforts in Major Manufacturing Industries, 199l-2009
R&D Intensity(7o)
lndustry
AVG
AVG
AVG
TGR
TGR
TGR
(r991-2000) (2000-2009) (1991-2009) (1991-2000) (2000-2009) (1991-2009)
()\
(l)
Chemicals
Food Products
Machinery
Metal & Metal Products
MiscellaneousManufacturing
Non-metallic Minerals
Textiles
Transport Equipment
Note:
Source:
0.26
0.08
0.63
0.16
0.08
0.l5
0 .l 5
0.57
(3)
0.43
0.20
o.76
0.ll
0.14
0.17
0.07
0.99
(4)
0.34
0.14
0.70
0.14
0.11
0.l6
0.11
0.78
(5)
'7.4
14.9
5.5
-3.9
8.7
9.0
10.2
1 8I.
(6)
(7)
5.7
t2.3
-0.4
-9.3
10.8
-9.0
7.0
5.5
10.4
2.1
-4.2
I -:)
1)
l.l
-4.1
6.3
AVG - Average; TGR - Trend Growth Rate
Prowess,CMIE.
Performance:
Financial performance of most of the
industries was quite satisfactory in the
post-liberalisationera, although it varied across
the industries.All the industriesexcept textiles
recordeda reasonablyhigh rate of profitability'E
during this period. Even in case of textiles,
profitability was not too low. But, what is more
important, perhaps,is that while profitability had
a negative trend in all the industries during
1991-2000,it registereda positiverate of growth
during 2000-09. Further, the trend growth rate
was very high in most of the industries(Table9).
This high trend growth rate of profitability in the
presentdecademay largelybe due to the increase
in marketconcentration(Table 3).
Table 9. Profitability in Major Manufacturing Industries, l99l-2009
Industry
Profitability (7o)
AVG
AVG
AVG
TGR
TGR
TGR
(1991-2000) (2000-2009) (1991-2009) (1991-2000) (2000-2009) (1991-2009)
(2)
Chemicals
Food Products
Machinery
Metal& MetalProducts
Miscellaneous
Manufacturing
Non-metallicMinerals
Textiles
TransportEquipment
Note:
Source:
10.31
9.93
'n.t2
Il.l6
t2.26
12.45
8 .l 9
10.49
(3)
8.86
9.38
10.88
t5.25
t 3.40
13.95
7.81
9.15
(4)
(5)
9.59
0 .l 3
0 . 1I
n?1
0.38
0.30
0.33
0.36
o.2l
9.b)
I 1.00
t3.zl
12.83
t3.20
8.00
9.82
AVG - Average;TGR - TrendGrowthRate;Neg.- Negligible(0<TGR<0.05)
Prowess.CMIE.
(6)
- l.J
-1.4
-3.2
-t.)
-4.3
-6.I
-9.4
- 1.5
(7)
0.0
3.9
10.5
13.5
r0.4
t2.7
I 1.7
6.)
voL.t9 No.3
INSTABILITIESIN MARKET CONCENTMTION
The samecan be said when we seeaverageof
rate of return on capital employed (Table l0).
Further, like profitability, the average rate of
returnalsohada negativetrendin all theindustries
during 1991-2000and the rate of growth was
429
positive during 2000-2009. However, unlike
profitability, only the industrieslike machinery,
metal and metal products, and non-metallic
minerals registered a reasonably high rate of
growth in rate of return on capitalemployed.
Table 10. Return on Capital Employed in Major Manufacturing Industries, 199l-2009
Industry
Rate of Return on Capital Employed
AVG
TGR
TGR
TGR
AVC
AVG
(1991-2000) (2000-2009) (1991-2009)(199r-2000)(2000-2009)(1991-2009)
rt\
(l)
Chemicals
Food Products
Machinery
Metal & Metal Products
Miscellaneous Manufacturing
Non-metallicMinerals
Textiles
Transport Equipment
Note:
Source:
16.58
21.42
18.44
8.57
14.28
13.64
11.11
19.63
(3)
18.93
18.67
18.86
t8.37
t3.21
17.r7
9.66
21.05
(4)
t'7.16
20.05
18.65
13.4'.1
13.75
15.41
10.39
20.34
(5)
(6)
(7)
-4.t)
2.7
-7.4
-5.9
l.l
t2.4
t3.2
4.6
13.2
6.7
9.2
0.9
-2.O
1.0
8.1
-1.4
ts
-2.5
1.5
-J.+
- 10.3
-tt.4
-15.6
-2.4
AVG - Average; TGR - Trend Growth Rate
Prowess,CMIE.
While non-metallicmineralsand textiles had
significant penetration in the international
market,it was reasonablyhigh for food products,
metal and metal products and miscellaneous
manufacturing.On the otherhand,machineryand
transportequipmenthad relatively low presence
in the exportsmarket.However,althoughall the
industrieshad higher averageexportsintensity
during2000-09comparedto that in the 1990s,the
trend growth rate differs across industries.
Industries like chemicals. metal and metal
products,and non-metallicminerals recordeda
relatively high rate of growth in exports
intensiryrein the post-reform era, whereas the
growth rate was quite low for food productsand
transport equipment and miscellaneous
manufacturing. Further, the trend growth rate ol'
export intensity was lower in food products,
non-metallicminerals,textilesandmiscellaneous
manufacturing during 2000-09 vis-d-vis that
during 1991-2000.
Table 11. Export Performance of Major Manufacturing Industries, 1991-2fi)9
ExportsIntensity(7o)
I ndustry
AVG
AVG
AVC
(1991-2000) (2000-2009) (r991-200e)
(2)
Chemicals
FoodProducts
Machinery
Metal & Metal Products
Manufacturing
Miscellaneous
Non-metallicMinerals
Textiles
TransportEquipment
Note:
Source:
5.84
I 1.57
5.75
8.80
10.82
t4.50
t7.93
6.74
AVG - Average;TGR - Trend Growth Rate
Prowess,CMIE.
l1l
12.94
12.66
10.5
1
Ib.vJ
12.40
29.O5
26.77
7.87
(4)
9.39
l2.ll
7.95
12.88
11.61
21.78
22.35
7.30
TGR
TGR
TGR
(1991-2000) (2000-2009) (1991-2009)
(s)
(6)
(7)
0.7
2.7
2.7
6.5
6.3
9.8
10.3
I 1.4
-0.1
5.0
7.1
4.5
6.3
8.3
-J.O
7.4
5.1
l.l
).1
7.0
2.5
4.8
'w
430
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
JULY.SEPT
2OO7
Thus, structure of market, strategiesof the deterministictrend.Since selectionof lag length
firms and their performance vary across is a criticalissuein theADF test,thepresentpaper
industries as well as over the period of time. applies Akaike Information Criteria (AIC), the
Because of their inter-linkages, variations nearest integers of (T)'/a and 4(T/100)2/eas
amongst these variables may have significant suggestedby Diebold and Nerlove [1990, Pp.
bearing on market competition. This may be 3-691,and Newey and West [994, Pp. 631-53]
particularly so as market concentration has respectivelyfor substantiatingthe results,where
registered a positive rate of growth in the T standsfor the numberof observations,(i.e.,the
post-reformera and the growth rate is relatively length of time frame).
high in all the industriesexcept food products,
metal and metal products and miscellaneous
In order to validate the findings,
manufacturing. While the liberal policies are Phillips-Penon
[1988,Pp. 335-3a6](PP) test is
aimedat bringing in greatercompetitioninto the also applied.The PP test is basedon the similar
market,suchpositivetrendgrowth ratemay make equationasemployedin theADF test,but without
market concentration diverge from the the lagged differencedterms. This test is based
equilibriumlevel.It is, therefore,necessary
to tesl on a more comprehensivetheory of unit root
if the time series of market concentrationis
non-stationarity.The test is similar to ADF test,
stationaryacrossindustries,for ifit is a stationary
but incorporatesan automaticcorrection to the
process,this would imply that it is characterised
Dickey-Fuller (DF) procedure to allow for
by a stableequilibrium. The next sectionof the
2"
autocorrelated
residuals
paperis an attemptin this direction.
IV. TESTING INSTABILITIES
IN MARKET CONCENTRATION
Methodology
In orderro examineif marketconcentrarionin
Ay,=o+Bt+Tlr-r+u,
where t= 1,2,..,7
()\
While the ADF test corrects for higher-order
serial correlationby adding lagged differenced
the PP testmakes
:t::::l:1"^T,io:i:"*t"oles'
manuracruring
(and':"ilJ#:1il'""1h:T:An h::jJ#Jr::i,ll:
theIndian
secror
isstationary
hencestable),we employ threedifferent testsof the pp test generallyhas greaterpower than
the
unit root. First, the Augmented Dickey-Fuller ADF test
Dolado,
Galbraith
and
lBanerjee,
[98], Pp. 1057-1072)(ADF) unit root test is
appried
io thenarurar
rogarithms
of market
iJ:llt;-,t;T';lKl,"li'ilt"ff::tilil1:?;
concentration measured in
terms of
631-53lisusedasthetruncationlagoverthestudy
(HHI) in the
Herfindahl-HirschmanIndex \''rl
rrrw period while
conductingthe pp test.
fbllowing specification
The third oneis theDickey-FullerGeneralized
(t= 1,2,..,T) LeastSquares(DF-GLS)test,proposedbyElliott,
Rorhenberg,and Stock [1996, Pp. 813-836],
tl3 which is a modified versionof the Dickey-Fuller
*
where, is the first differen." op"ruror, y,
/ test' The DF-GLS test uses the following
naturallogarithmofHHl,/isthetimetrend,and
specification;
u, is an independentlyand identicallydistributed
processwith mean 0 and variancet'. The null Ayf =fyl_,+ib,ayl_,+u,
j=r r ''l
hypothesisis that H,,:Y = 0, which impliesthat
there is a unit root in y,. This null hypothesisis (3)
'd' denotes
testedagainstthe alternativehypothesis
H,: y< 0 wheret = I , 2, ..,T andthesuperscript
which implies yr is stationary around z GLS-detrended
y.2r
seriesof
.
Ay,=c+0t+?I,-r + ) 6,Ay,_,
+u,
i=t '
voL. 19NO.3
IN STABI LITI ESIN M ARKET CONCENTRAT
ION
The DF-GLS test has the same null and null hypothesis that there exists unit root in the
alternativehypothesesasthetraditionalADF test, time-seriesof HHI for all the industries.Neither
i.e., H,,: Y = 0 versus Hr: Y < 0. Although the ofthe teststatisticsis statisticallysignificant.2a
As
lag-selectionissuein theDF-GLS regressions
has stationarityrequiresstatisticalsignificanceof the
received much attention, in the present paper, test statistic it can therefore be said that the
followingNg andPerron[2001,Pp. 1519-1554], time-series of market concentration of these
we use the Modified Akaike Information industries have unit root and therefore are
Criterion (MAIC) for this purpose.This MAIC non-stationaryin nature.Further,the teststatistic
providesthe bestcombinationof size and power for all the industries except chemicals and
in finite samples when combined with the transportequipmentare the positive. A positive
GlS-transformation. Further, MAIC takes into test statistic though is a theoreticalpossibility,
account the nature of the deterministic rules out stability of the respectivetime-series.2s
components and the de-meaning/de-trendingThis means that the time-series of market
procedure,which allows a bettermeasurement
of concentration of these industries also are
the cost ofeach lag-lengthchoice[Lopez,2004]. explosive and non-stationary.In other words,
market concentration will diverge from
Although several measures of market equilibrium over the period of time.
concentration,such as, market shares, n-firm
concentrationratio, Herfindahl-HirschmanIndex Table 12, Results of Augmented Dickey-Fuller Unit Root
Test
(HHI), profitability, etc. are suggestedin the
industrial organisationliterature,in the present
ADF
ADF
ADF
paper we use only HHI for the purpose of lndustnes
(AIC)
(L=2)
(L=3)
examining stability in market concentration.As
(2)
(3)
(4)
notedearlier,the HHI is definedasthe sum of the 0 )
squares of the relative sizes (expressed as FoodProducrs
1.822(4) 5.623
3.005
proportionsof the total size of the market)of the Chemicals
-l .246(l) - l .546
- l .995
firms in the market.22
The value of HHI declines Textiles
2.446(1) 3.201
3.825
1.637
with increasein the numberof firms andincreases Meral& MeralProducrs I .719(0) 1.298
Minerals 3.086(l)
2.782
3.824
with rising inequality among any given number Non-metallic
Machinery
2.028(3) 2.0'18
2.028
of firms. The maximum value of this index is I
-2.607(0) -1.581 -1.149
Equipment
Transport
when only one firm occupiesthe whole market. Miscellaneous
Data used are collected from the PROWESS Manufacturing
1.550(0)
L7 I 8
l|t}g
databaseof the Centre for Monitoring Indian
Note: Figures in parenthesesrepresent the respective lag
Economy(CMIE).
lengths.
EconometricResu!ts:
In the presentpaper,the unit root test is carried
out fbr the periodfrom 1991-92to 2008-09,i.e.,
for l8 years.So, following Diebold and Nerlove
[1990,Pp.3-69] andNewey andWest [1994,Pp.
63 I -531lag length of 2 and 3 are selectedfor all
the industries.However, the lag length selected
on the basis of AIC varies acrossthe industries
(Table l2).23The resultsof the ADF unit root test
presentedin Table I 2 favour non-rejectionof the
The samecanbe saidfor the resultsof both the
PP test and the DF-GLS test for unit root (Table
l3). In case of the PP test the test statistic is
negative,thoughnot statisticallysignificant,only
for chemicalsand transportequipment.On the
other hand, the DF-GLS test gives negativetest
statisticfor all theindustriesexceptchemicalsand
machinery, but none of them is found to be
statistically significant. Thus, the DF-GLS
stronglysubstantiates
the findings of the ADF or
PP test of unit roots.26
432
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
JULY.SEPT
2OO7
Table 13.Resultsof Philips-PerronTest and Dickey-FullerGLS Test for Unit Root
Industry
(l)
Food Products
Chemicals
Textiles
Metal & Metal Products
Non-metallic Minerals
Machinery
Transport Equipment
Miscellaneous Manufacturing
PhilipsDickeyPerron Test Fuller GLS
(L=3)
Test
(2)
(3)
3.596
-r.367
4.327
1.191
6.644
r.486
-2.565
2.905
-1.258(3)
Ll59 (l)
-0.206(4)
- l . l 1 5( 2 )
-1.123(2)
0.366(6)
-0.480(7)
-0.699(l)
industry risks (IR), profitability (PROF), export
intensity (EXPI) and import intensity (IMPI) of
the previousyear,i.e.,
coNi, - f (Mszi.t-1,GRsi,,-r,IMPIi,,,r,ADVTi.i.r,
MKTi.,_r,DISTi.,.r,RDi.,.r,PROF|.!r,
I R i . , _E
r ,X P I i . , _ r )
. . .( 4 )
Here. MSZ, GRS and IMP stand for other
structuralaspectsof the market, ADVT, MKT,
DIST, and RD for conduct and IR, ROCE and
EXP for performance.EXPI and IMPI are also
Note: Figures in parentheses represent the respective lag expectedto capture the impact of trade related
length.
policy changesby the government on market
The details of measurementof
Thus, it can be said that the time-seriesof concentration.2T
market concentrationof the major industriesin these explanatory variables are presentedin the
Indian manufacturingsectorhasunit root. When Appendix.
it is so, the time path of market concentration
(MSZ): Greaterthe size of the market
diverges from the equilibrium over the period Market Size
industry,
of
an
higher the scopeof largerfirms to
time. This meansthat all the major industriesin
their
control
overthemarket.In otherwords.
raise
thesectorsufferfrom theproblemsof instabilities
particularmarket is likely to
in
a
concentration
in market concentration.Such instabilitiesmake
with
increase
the
size
of the market.On the other
forecasting of market concentrationextremely
provide opportunityto
larger
market
may
hand,
difficult.
the new firms to enter into the market and thereby
V. DETERMINANTS OF INSTABILITIES
may restrict increase in market concentration
IN MARKET CONCENTRATION
[Bhattacharya,2002].Relationshipbetweensize
In the previous section, the empirical ofa marketandconcentration,therefore,depends
evidences clearly suggest that the Indian on which of thesetwo forcesdominates.
manuf'acturing
sectorsuffersfrom the problemof
instabilitiesin market concentration.Therefore- Growth of Sales(GrRS);It is expectedthat ceteris
controlling for
divergence of
market paribus, a market that expandsat a higher rate
concentration requires identification of its experienceshigher concentrationwhen entry is
determinants.In this section,we make an attempt restricted.In theabsenceof strategicor legalentry
to identify the determinants of market barriers,a fast growing industryalso attractsnew
concentration following
our
theoretical firms and thereby enhancescompetition in the
understandingin Section II and the empirical marketplace. Impact of growth on market
backdrop of different aspects reflecting the concentration,therefore,dependson the relative
structure, conduct and performance in major strengthof theseforces.
industries in India discussedin section III. In
order to do so, we assumethat concentration Import Intensity (IMPI): An industry with higher
(CON) in an industry in any year is a function of import intensity is expected to be more
market size (MSZ), growth of sales (GRS), competitive.This may be true, especially,when
advertising intensity (ADVT),
marketing thedomesticfirms arecapableof facingthe threat
inrensiry (MKT), distribution inrensity (DIST), of competition.But, if the weak onesfail to resist
research and development intensity (RD), the competitivethreat from quality imports and
voL. 19NO.3
I N STABILITI ESIN MARKET CONCENTRAT
I ON
leave the industry, market share of the existing impact of R&D on market concentration,
firms may go up raising the level of market therefore, depends on the relative strengths of
concentration [Bhattacharya, 2002).
variousdiverseforces.
Advertising Intensity (ADVT): On the one hand, Profitability (PROF): On the one hand, higher
advertisement spreads information about the profitability in an industryis likely to attractnew
productsof the firms of the industry.On the other
firms into the industry. In the absenceof legal
hand,it establishesbrand and createsbarriersto
barriers, if the incumbents fail to create
entry of new firms into the market.This givesthe
sufficiently strong strategicbarriers, entry will
incumbentsenoughopportunityto restrictentry
placeresultingin lesserconcentrationin the
of new firms andto raisetheir marketshare.Thus. take
marketplace.
On the other hand, higher
we expecta positive impact of advertisementon
profitability
raisesthe ability and willingnessof
market concentration [Comanor and Wilson,
1974; Martin, 1979a, Pp. 639-47; Shepherd, the existingfirms to grow increasingthe level of
1982, Pp. 613-626; Das et al. 1,993, Pp. concentrationin the market.The exactimpact of
the rate of return, therefore, depends on the
1409-14121.
relative strengthof thesetwo oppositeforces.28
Marketing Intensity (MKT): Marketing related
expenditureshelp a firm to promote the product Industry Risk(lR): Industryrisk or variability in
and reachthe consumers.Productpromotionand industry performance may influence market
customersatisfactionare crucial complementary concentrationin a number of ways. When the
assets for a firm as they provide distinct
firms in the industry are risk averse, higher
competitive advantage in the marketplace.
industryrisk may restrictgreen-fieldexpansion,
Therefore, the industries with greater marketing
i.e., creationof new productivecapacity by the
efforts by the incumbentsare likely to be more
onesor entry ofthe new ones,leavingthe
existing
concentrated.
marketconcentrationby and large the same.It is
Distribution Intensity (DIST): Firms build up also possiblethat the presenceof high industry
distribution network to facilitate supply of the risks will increase concentrationbecause the
productsin right time. Wide distributionnetwork largerfirmsmay bemoreableto withstandgreater
also helps the consumersto have easy accessto risk. Further, when thesefirms use the route of
the products.Therefore,like marketing,onemay mergers or acquisitions as risk reduction
expect the industries with greater distribution mechanismsin respectof growth or entry into the
related expendituresto have more concentrated industry, market concentrationin the industry
market.
may go up.
R&D Intensi4, (RD):' Innovation enhances
competitiveness of the successful firms by
facilitating developmentsof new products and
processes.
While greatercompetitiveness
is likely
to enablethe domesticfirms to competeagainst
the multinationalsand thereforepreventmarket
concentration,it can also wipe out the small and
inefficient firms from the market and thereby
raise market concentration. Further, greater
innovative efforts by the incumbentscan also
restrictentryof thenew firms intothe market.The
*)\ir'
- -i
.--..
Export Intensiry (EXPI): Higher export intensity
of an industry signalsgreaterpenetrationin the
internationalmarket and lesserconcentrationin
thedomesticmarket,especiallyby thelargefirms.
When this is so, market sharesof the large firms
decline in the domestic market making the
industry more competitive.Therefore,one may
expect an inverse relationship between export
intensityand market concentration[Chou, 1986,
Pp.429-331,
434
JOURNALOF INDIAN SCHOOLOF POUTICAL ECONOMY
JULY.SEPT2OO7
In the presentpaper, equation (4) is estimated LagrangeMultiplierTest.30In REM, it is assumed
with a paneldatasetof eightmajor industrygroups that the interceptof the regressionequationis a
over a period of l7 years.2e
This pooleddatasetis randomvariable,i.e.,
expectedto control for variations both over time
as well as across industries. It should be CO\, = 61,,tl2MSZi.,-r,03 GRSi.,.r,+ cn IMPI,.,-,,
+ cr5ADVT,.,-,,+ oroMKT,.,_,,+ cr, DIST,.,.,,
mentionedthat, following Kambhampati[ 1996],
+
0, RD',-,, + or, PROF',-,,+ 0,roIRi,!r,
one-year lag is introduced in the explanatory
+ o , E X P I . , - , )+ u , ,
. . .( 5 )
variables to control for the non-instantaneous
relationshipsbetweenthe dependentvariableand
Here, dr, = clr * ti
... (6)
many of the independentvariables. Such lag
This implies thatthe intercept is assumedto be
structure is expected to control for the
arandomvariablewith acommon meanvalueo,.
endogeneity problem in the envisaged
Here, the cornmon mean value of the intercept
relationship. However, while the study of
(crr) stands for the population mean and the
Kambhampati[996] coversthe period 1974-85,
industry specific intercept differs from the
thepresentpaperfocuseson marketconcentration
population mean by the error term e1. The
of Indianmanufacturingsectorinthe post-reform
rationalebehindsuchassumptionis that when 'n'
era with adequatecontrol for competition from
cross sectional units are drawn from a relativelv
imports, conducts like marketing, distribution
large population,3' the individual effect is
and in-house R&D, performance in the
characterizedasrandom and inferencepertainsto
internationalmarket, (i.e., exports),and market
the population from which the sample is drawn.
risks, (i.e., variability in rate ofreturn on capital
In the presentcontext,we considera set ofeight
employed).Although these variablesmay have
major manufacturingindustries,which is only a
significantimpact on market concentration,they
small part of a much larger universe of Indian
were not considered by Kambhampati [996]
corporate sector.32Further, the firms in each of
while examining the determinants of market
the industries may have a large number of
concentration.
decisional/strategic options. Therefore, even
when we control for the determinants of the
In a panel data regression, choice between
industry's concentrationratio, this may not be
fixed effects model (FEM) and random effects
exhaustive33
causingheterogeneitiesin industry
(REM)
model
is a critical issue.However, since
specific intercepts. Such industry specific
present
in the
context,the numberof time-series
differencesin interceptsare reflected in the error
observation is large as compared to the number
term ei. Substituting(6) in (5) we get,
ofcross-sectionalunits, there is likely to be very
little difference in the values of the parameters
CO\, = 6t, a2MSZ.,-,,
o, GRS,,,.,,
+ c. IMPI,,,-,,
estimatedby the FEM andREM [Gujarati,2007].
+ os ADVTi,r-r,
+ ok MKTi.r.r,+ c,,DIST,.,-,,
This is so because in REM the intercept is
+ o* RD,,,_1,
+ ooPROF,,,_,,
+ o,pIR'.,_1,
assumed to have a iross-sectional random
+ a,, EXPI',-,)+ <on
...(7)
component whereas in FEM the intercept is
treatedasfixed and non-random.Therefore,when Here, {01,= E, * u1
the time-series observations iue large as
compared to the cross-sectional units, the
This means that the composite error term of
cross-sectional random component of the equation (7) consists of cross-section specific
intercept in REM does not make any major enor (q) as well as combined time-series and
difference vis-d-vis the intercept of the FEM. So, cross-section
error component(qJ. It is assumed
in the presentpaper, equation (4) is estimatedby that the errors follow normal distribution with
applyingREM andtheassumptionofrandomness zero mean and constant variance. It is also
is confirmed by using the Breusch-Pagan assumedthat the individual error componentsare
voL. 19NO.3
435
INSTABILTTI ESI N M ARKET CONCEM MT ION
not correlated with each other and are not statistic is also statistically significant. This
autocorrelated across both cross-sectionand confirms the random effects as assumedin the
estimatedmodel.
time-seriesunits. That is.
Table 14. Determinants of Market Concentration
q-N(O,o1)
Variable
u,,-N(O,{)
0)
= E(€iej)= 0(i * j)
E(€,u,,
Constant
MSZ
GRS
IMPI
ADVT
MKT
DIST
RD
PROF
IR
EXPI
Numberof Observations
Wald 26'z
Prob.> 12
R'z- Wirhin
R2Between
R2- Overall
Breusch-Pagan
262
Prob. > 12
E(u,,u*)= E(u,,U = E(ui,\.) = 0(i #j;t * s)
Therefore,
E(trl,,)= 0
= d+d
Var(to,,)
d
= -(t
Now,corr(or,,,o,")
q+q
# s)
Coefficient
(2)
-5.2t9
4.052
-0.003
-0.343
o.23r
-0.518
0.890
0.525
0.526
0.205
-0.867
z
(3)
-2.09
3.t7
-0.o2
-3.53
1.84
-2.65
4.O2
4.09
l .60
2.10
-3.89
.
P>lzl
(4)
0.036
0.002
0.985
0.000
0.065
0.008
0.000
0.000
0.109
0.036
0.000
135
109.25
0.001
0.0244
0.740'l
0.4684
263.09
0.001
This meansthat the compositeerror terms of
a given cross-sectionalunit at two different time
points are correlated.Importantly, for any given
crosssectionalunit, the value of this correlation
As regards the individual coefficients,it is
coefficient remains the same at two different observedthat the coefficientsof all the variables,
times even if the two times are distinctly away except that of PROF and GRS, are statistically
from each other. Further, the correlation significant.While MSZ, ADVT, DIST, RD and
coefficient also remains the same for all the IR havestatisticallysignificantpositiveinfluence
individual units. When it is so, estimation of on market concentration.IMPI. MKT and EXP
equation (7) by the method of ordinary least have statisticallysignificant negativeimpact on
squareswill result in inefficient estimators.So, the same.In other words, the regressionresults
following Gujarati 120011,in the presentpaper, suggestthat, larger market or higher spending
equation(7) is estimatedby applyingthe method advertisement,distribution and innovation or
greater industry risks raises the degree of
of feasible generalizedleast squares(FGLS).34
concentrationin the marketplace.On the other
Further, all the variables are measured in
hand, greater import or export intensity or
logarithmic scale and therefore the individual
marketingefforts reducesthe same.
coefficientsgive respectiveelasticity.This will
help us to comparethe relativeimportanceof the
Larger market motivates the incumbents to
of marketconcentration.
determinants
grow in sizeand,thereby,to raisetheir control in
The regressionresultsare summarizedis Table
14.35The resultsshow that the Wald 12 statistic
is statisticallysignificant.Value of R2 is also
reasonablyhigh. This means that the estimated
model is statistically significant with sound
explanatory power. Further, Breusch-Pagan12
the market. The direct relationship of market
concentrationwith sizeof the market contradicts
the findings of many of the earlier studies,[e.g.,
Bhattacharya,2002;Delorme et al., 2002, Pp.
l3-20136
andsuggeststhatlargersizeof themarket
doesnot necessarilyimply lower levelsof market
concentration. Similarly, while advertising
436
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
TULY.SEPT
2OO7
increases market concentration and thereby firms may have less concentrated markets.
reducesconsumers'welfare by creatingspurious However, any definite conclusionrequiresfurther
product differentiation and barriers to entry, investigationin this regard.
distribution does the same by extending easy
accessto the products.
The paper does not find any significant
influence of growth of salesor profitability on
The observation of statistically significant marketconcentration.
As regardsgrowth of sales,
positive coefficient of R&D confirms the on the one hand, a growing industry creates
proposition that innovation raises market opportunitiesfor the existing firms to expandin
concentrationby helping the firms in producing the sameline and raisecontrol in the market.On
quality products at lower costs. Further, the the other hand,it also attractsnew firms into the
positive and significant coefficient of industry industry and makes the market competitive.
risksimplies thathighersuchrisks discouragethe When theseeffectsare balanced,growth of sales
new firms from entering into the industry and does not have significant impact on market
enablemainly the larger firms to withstand the concentration. The same can be said for
situation.As a result,the degreeof concentration profitability as well. While higher profitability
increaseswith increasein industry risks.
raisesability and willingnessof the incumbents
to grow, new firms are encouragedto enter into
On the other hand, higher export intensity is the market.The balancingstrengthof thesetwo
observedto result in lesser penetrationin the diverse forces leaves market concentration
domestic market and hence reduces market unchanged.
concentration.
Suchinverserelationship
between
market concentration and export intensity is
Hence, market concentration in Indian
consistentwith the findings of Chou [1986]. manufacturingsectordependson the size of the
However, the finding of statisticallysignificant market, extent of import competition, export
negativeinfluenceof import intensityon market performance, and advertising, marketing,
concentration is theoretically consistent but distributionand innovationrelatedefforts of the
contradictswith the notion that increasingthreat firms, rate of return on capital employed and
from imports raises market concentration export intensity. While size of the market,
[Bhattacharya,2002).This may possibly be due advertising,distributionand R&D relatedefforts
to larger impact of efficiency gain as compared andindustryriskshavepositiveimpacton market
to exit effects of greater competition from concentration, import competition. export
imports.
performanceandmarketingeffortshavenegative
influence on the same. It is evident from the
Interestingly,contrary to generalperception, individual coefficients. which stand for the
marketingefforts are observedto have negative respectiveelasticitythat the absolutestrengthof
influenceon market concentration.One possible influence varies across the determinants.The
explanationfor this seemsto be failure of the combinedimpactof a unit changein the variables
incumbentsto takefirst mover advantagethrough with positive impact like market size (4.05),
the activities like first promotion, after sales advertisingintensity (0.23), distribution efforrs
service and customer relationships.It is also (0.89), R&D intensity (0.53) and indusrry risk
possiblethat the new playersinto the market are (0.21) appearsto be much higher than that in the
successful in breaking customer inertia and variables with negative impact, i.e., import
building their own brand image.When it is srj, competition(-0.34),marketingefforts(-0.52)and
industrieswith greatermarketing efforts by the export intensity(-0.87).
VOL.19 NO. 3
IN STABI LITI ESI N MARKET CONCENTMT I ON
As shown in Section III, the determinantsof
market concentration have recorded positive
growth in most of the industriesduring theperiod
under consideration.Further, the trend growth
rateof marketingandexportperformancein none
of the industriesis significantly higher than that
of the determinants with positive impact on
marketconcentration.Even if importcompetition
has increased at a high rate in majority of
industries,the correspondingelasticity is very
low. This implies that high import competition
does not necessarilyhave stronger impact on
market concentration. All these cause the
time-seriesof market concentrationto become
explosive,i.e.,deviatingaway from equilibrium.
VI, CONCLUSIONS AND
POLICY IMPLICATIONS
In this paper, we have made an attempt to
examine the existenceof instabilitiesin market
concentration and the determinants of
instabilitiesin themajor industrygroupsof Indian
manufacturingsector.While time seriesunit root
test is used to examine instabilitiesin the time
pathof market concentration,paneldatarandom
effects model is applied to identify the
determinantsof such instabilities.The empirical
findings suggestthat there is a prevalenceof
instabilities in market concentrationin all the
major industriesof the sector.This meansthatthe
time path of market is non-stationaryin nature
and,therefore,deviatesfrom equilibriumoverthe
period of time. Further,market concentrationin
Indian manufacturingsectordependson the size
of the market, extent of import competition,
export performance,and advertising,marketing,
distributionand innovatlonrelatedefforts ofthe
flrms, rate of return on capital employed and
export intensity. While size of the market,
advertising,distributionand R&D relatedefforts
andindustryriskshavepositiveimpacton market
concentration, import competition, export
performanceandmarketingeffortshavenegative
influenceon the same.As the combined impact
of a unit change in the variableswith positive
impactappearsto be much higherthan that in the
variableswith negativeimpact,thetime-series
of
437
market concentrationbecomes explosive, i.e.,
deviatingaway from equilibrium over the period
of time.
The findings discussed above have some
important policy implications for enhancing
competitionin the marketplace.When the market
size is large the incumbents may have the
flexibility of adopting a variety of strategy to
restrictentry of new firms and therebymay limit
market competition.Increasein competition in
larger markets therefore requires controlling
unfair and restrictive businesspracticesby the
firms. The competition policy should have
adequate scope to deal with such business
practices.In addition,legal entry baniers should
be relaxed further to facilitate entry in such
markets.
Since greater risks are observed to result in
higher market concentration, efforts should be
made in controlling the risks in the marketplace.
This can be done by encouragingthe firms to
diversify and grow in different lines of business
insteadof expandingthe same in a single line.
Suchdiversificationof productportfolio may be
expectedto help the firms in distributingthe risks
acrossproductsand hencereducing the sameof
concentratingin a singleline of business.
The positive coefficient of the variableR&D
implies that industrieswith greater innovation
efforts are likely to have greater market
concentration.Since incidence and extent of
R&D efforts by the firms vary directly with
industryrisks [Mishra,2007,Pp.68-81], when
the intellectualpropertylaw and its enforcement
are made strict and uncertainties in the
marketplacearecontrolledfor, innovativeefforts
are likely to be encouraged.This may result in
wider set of choices for the consumersin the
product market (when the efforts are for product
development)or lower cost of production(when
the efforts are for process development) and
hencelower pricesof the products.But, this may
in turn also help the firms with successful
innovativeefforts to raise control in the market
438
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
JULY-SEPT2OO7
and thereby result in greater market
concentration.Therefore,while for the countries
like India with low innovativeeffortsby thefirms,
intellectualpropertylaw andits enforcementmay
be madestrictto maketheenvironmentconducive
law andpolicy
forin-houseR&D, thecompetition
may be directed towards addressing the
detrimentaleffects on market concentration.In
other words, possibility of integration of
intellectual property law and competition law
may be explored.
industrial competence and capability, the main objective of
the current endeavor is to bring about all the changes in
attitudes and priorities required in the new age of efficiency,
productivity and competitiveness.
6. Compared to the domestic firms, the MNCs are,
however, better placed in the acquisition game due to their
deep pockets and relatively cheaperaccessto capital [Basant,
2000, Pp. 813-8221.
'1,
See, Kumar [2000, Pp. 2851-2858] for more
information in this regard.
8. This is so because as the relationships are not
instantaneousIKambhampati, 1996], the diverse forces
influencing the structure of the market may or may not be
balancedin the long run. And, when these diverse forces are
not balanced,instabilityin marketconcentrationis very likely.
9. Although the studiesby Basant and Morris [2000],
Further, the negative coefficients of exports
andimportssuggestthatincreasein international Beena[2000] and Mishra [2005] deal with examiningtrends
of market concentration in relation to industry/firm
tradereducesmarketconcentration.Hence,there performance, various corporate strategies and their policy
shouldbeenoughprovisionsto encourage
exports implications, the dynamic aspectsof market competition are
and importsin the tradepolicy. This may be done not adequatelyaddressed.
I 0. Thereexista numberofstudiesthathaveusedunit-root
by reducing tariffs, quotasand duties. A liberal
test to examine instability in market concentration. For
trade policy can largely complement the example,Callet and List
[2001, Pp. 473-80] apply unit root
competition policy and raise competition in the tests to examine market share behaviour of individual firms
in the US cigarette industry. Resendeaand Lima [2005, Pp.
marketplace.
713-7181investigatemarket share instability in Brazilian
industry for the period I 986-98 by using panel data unit root
NOTES
tests.
11. However, there are also possibilities of feedback
I . Here, by instability we refer to divergenceoftime path
of market concentration from its equilibrium, i.e., effects from structure and/or conduct to policy. For example,
non-stationarity of market concentration over the period of while policy changes of the 1990s had changed basic
time. When it is so, the time-seriesof market concentration environmentand functioningofthe Indian corporatesectorin
will have a time varying mean or a time varying variance or a considerableway, the wave of M&As and other collusive
strategiesofthe I 990s and emerging market conditions forced
both.
2. This may largely be becauseofoverwhelming focus to draft the Competition Bill, 2002. Further, there might be
in economic research inside the paradigm of static two-way relationships between policies of the govemment
and performance of the firms in an industry. For example,
competition.
3. The term concentration is usedto understanddeviation while a reduction in taxes and/or increasein subsidiescan
from competition. Markets that are highly concentrated are raise profitability ofthe firms, unsatisfactory performance of
Iesscompetitivethan the marketswhere competitionis less. an industry may compel the govemment to correct policies
4. In the new policy regime,not only the restrictionson relating to public investment,regulationand controls,taxes
mergers, acquisitions and entry of large firms under the and subsidies,etc.
12. HHI ofan industry is defined as the sum ofthe squarc
Monopolies and RestrictiveTrade PracticesAct (MRTPA)
have been removed completely, the entry restrictions on
=
private sector enterprises unde'rthe Industries Development of market sharesofall the firms inthe industry, i.e., HHI i .;
l=l
and RegulationAct (IDRA) andthe shareholdingandbusiness
restrictions on multinational corporations (MNCs) under the
Foreign Exchange Regulation Act (FERA) have also been
relaxedsubstantially.
5. The irnportanceof such opennessin the new policy
regime can be seen in the failure of the earlier development
strategies.The new policy measuresare not only considered
to be the most profound changesthat have taken place since
independence,they are also different from the earlier periods
in their basic objectives and priorities. While much of the
previouspolicy resolutionswere aimedat protectingthe sector
from the theat of intemational competition and providing
enough breathing space for the indigenousdevelopmentof
where s, and n stand for market share of thejth firm and total
number of firms in the industry. HHI is widely used in the
industrial organization literature to indicate the degree of
sellers' concentration in the marketplace.
13. Here, we have measuredthe growth rate ofmarket by
fitting the trend line for sale (s) In(s; = c + p, + u, over the last
three years. The estimated coefficient p stands for the trend
growth rate of market.
14. The DepartmentofJustice, USA considersa market
with HHI of 0. I 0 as less concentrated,between 0. l0 and 0. I 8
as moderately concentrated,and above 0.18 as highly
concentrated.
voL. 19NO.3
IN STABILITI ESIN MARKET CONCENTMTI ON
I 5. Here, advertising intensity is defi ned asthepercentage
shareof advertising expenditure in total salesof the industry.
16. By marketing intensity we refer to percentageshare
of marketingrelatedexpenditurein total salesof the industry.
Marketingexpensesincludecommissions,rebates,discounts,
sales promotional, expenses on direct selling agents and
entertalnmentexpenses.
17. Here, we define distribution intensity as percentage
shareof distribution relatedexpenditure,(i.e., expensesfor
delivering the products to the different agents of distribution
network along with outward freight) in total sales of the
industry.
18. Although there are alternative measures of
profitability, in the presentpaper we use the percentageshare
of proht before interest and tax (PBIT) in total industry sales
as an indicatorof the same.
I 9. Here, by export intensity we refer to percentageshare
of foreign exchange eamings from exports of goods to total
industry sales.
20. Although the test usually gives the sameconclusions
as the ADF tests, the calculation of the test statisticsis
complex.
2l . The term GLS-detrendedrefers to the detrendedseries
of the variable,(i.e., seriesof the variable without the trend
component)obtainedby usingGLS method.This meansthat
Vi = V,- ||Here,
I is the least-squareestimate of the quasi
difference of ( on that of y, with (,. The quasi-differencesof
(u
given
and
respectively,
are
by
1
Y,= (Yr;(Yz- aYr)i....;(y1- ayt.'))and
Z, = (2,;(22- aZ,):... :(7-r- aZ,i). See,Lopez [2004] for the
detailsin this regard,and in particular how the value ofc is
determined.
22. The HHI is generallyconsideredto be thebestmeasure
of market structure as this index satisfies all the desirable
propertiesof a concentrationmeasureby combiningboth the
number and size distribution of firms in the industry. Further,
by squaring market sharesthe HHI weights more heavily on
the values for large firms than for small ones. The HHI is,
therefore,popular in use and is consistentwith the theory of
oligopoly becauseof its similarity to measuresof monopoly
power.
LJ.
As examination with the Schwarz Bayesian
Information Criterion (SBIC) and the Hannan Quinn
InformationCriterion(HQIC) alsosuggestthe samelag length
as the AIC.
24. For statistical significance, the test statistic should be
more negativethan its critical value, which is not the case
here. In other words for its statistical significance, value of
the test statistic should be negative and sufficiently large in
absolutevalue.
25. This is so becausestability of a time-seriesrequiresy
< 0. So, when 1> 0, this automaticallyrulesout the possibility
of stationarity,and henceindicatesthe presenceof unit root.
26. This is very important as the conventionalunit roof
tests lose power dramatically against stationary alternatives
with a low order MA process that is generally observed in a
439
number of time series variable and the DF-GLS has
substantially improved power in such cases.
27. In this context, it should be noted that the ideal way
of modelling market concentration is to incorporate lag
structure in the envisaged relationship. But, in the present
paper data limitations restrict us from doing the same.
However, the panel dataset used for estirnating the model
largely takes care of the dynamic relationships amongst the
variables and the adjustment process over the p€riod of time.
28. When the effects are balanced,ROCE does not have
any statistically signifrcant impact on market concentration.
Using simultaneousequation approach,Delorme et al., [2002]
find no statistically significant impact of lagged profitability
on market concentration.
29. In the presenceof unit roots, application of Enor
Conection Model may be a better choice for identifying the
determinants of market. But, such an attempt requires
sufficiently long time-series data to adequately capture the
relevant variables. Since we have data for only l8 years it is
difficult to estimate Enor Correction Model efficiently. So,
in the present context, we use panel data model for
indentifying the determinantsof market concentration.Here,
we consider market concentration as the only endogenous
variable.We control for possiblesimultaneityby assuming
that the influence of the independent variables on market
concentration is not contemporaneousand henceintroducing
one year lag in the independentvariables.
30. There are two distinct advantagesof applying REM
over FEM. First, while the observed characteristics that
remain constantforeach individual are dropped in FEM, they
are retained in REM. Second,unlike the FEM, the REM does
'm' (the
not lose
number of groups) degreesof freedom as it
is not requiredto estimate'm' cross-sectional
intercepts.This
is very important when we have limited number of
observationsas it is in the presentcase.
31. Here, by large population we refer not only to an
infinity of individual units but also to an infinity of decisions
that eachcross-sectional
unit may take.
32. In additionto manufacturing,Indian corporatesector
also consistsof mining, electricity,constructionand services
(both financial and non-financialservices).
33. In fact, marketconcentrationmay be influencedby a
large number of other factorsin additionto thoseconsidered
in the presentmodel. For example, the degree of sellers'
concentrationmay be influenced to a large extent by the nature
andextentofmergersandacquisitionsinthe industry.In India,
the nature and extent of mergers and acquisitions varied
widely across industries in the postreform era [Basant and
Morris, 2000; Mishra, 20051.However, dueto lack of sysremic
data, the presentpaper fails to capture this aspect.
34. In FGLS, first OLS is used to derive an estimator of
the covariance matrix of the error term. Second, this
covariance structure is used to estimate the coefficients.
35. R&D expenditure in transport equipment for the year
2006-07 is reportedto be negativein the PROWESS database.
So, while estimating the random effects model that
observation is treated as a missing value.
36. While Bhattacharya [2002] observes starisrically
440
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
signifi cant negative infl uenceof market size on concentration,
Delorme et al., [2002] hnd no statistically significanf
relationship between market concentration and profitability.
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Appendix L Measurernent of the variables
As mentionedearlier, the presentpaper usesdatacollected
from the PROWESS databaseof CMIE.
with S,,being salesof firmj in year / and n the number of firms
in the industry.
Murket Concentration: Given its multi-dimensional nature.
defining and measuring degree of market concentration are
very difficult tasks and thereby contain erroneous problems
[ S c h e r e r1, 9 7 3 ;S h e p h e r d1, 9 8 2 ;L a l l , 2 0 0 1 ,P p . l 5 0 l - 1 5 2 5 ] .
In the present paper, we measure the extent of market
concentrationin terms of degreeof sellers'concentrationand
Herfindahl-HirschrnanIndex (HHI) is used as a measureof
the same.HHI of industry i in year t (HHI,,) is definedas the
sum of the square of market shares(.r) of all the firms in the
industry,i.e.,
Market Size: Market size of industry i in year , (MSZiJ is
measuredas the natural logarithm of total sales (S) by all the
firms in the industry,i.e.,
HHI,, = I so'
r" I
MSZ,,=lodIS,l
LI=I
J
whereS,,standsfor salesoffirmj in yeartandn forthe number
of firms in the industry.
Growth of Sales.'In the present paper, the rate of growth of
salesof industry i in year I (GRS,,)is measuredin terms of the
trend growth rate ofsales over the last three years.This is done
by estimating the following trend equation:
where wider set of choices for the consumers in the product l o g ( S , ) = B , + p r t + u ,
market (when the efforts are for product development) or
The coefficient p, gives the trend growth rate. Apparently,
lower cost of production (when the efforts are for process
fitting a trend equation for ttuee years may look unreasonable
development)and hencelower prices ofthe products.
due to low degrees of freedom, but it may not be so in the
5..
present context as we are not examining the statistical
s i=
, ;.
significance ofthe estimatedcoefficients as well as that ofthe
ts
estimatedtrend line. The main advantageof computing trend
442
JOURNALOF INDIANSCHOOLOF POLITICALECONOMY
growth rate as compared to the rate of change ovef the
three-yearperiod is that the former controls for the variability
in growth over the period oftime. The rate of changedoes not
take care of this variability.
Advertising Intensity: Advertising intensity of industry i in
year t (ADVT,') is measured as the ratio of advertising
expenditure(AE) to sales(.S),i.e.,
:AE.'
ADVT,, =ril-
Isu
JULY.SEPT
2OO7
where RDE1, and S1,stand for R&D expenditure and sales
respectively of firm j in year t and n for the number of firms
in the industry.
Profitability: Profitability in industry I in year t (PROF,,) is
measuredas the ratio of profit before interest and t^x (PBI\
to sales(S), i.e.,
tPBIT,,
PRO\ =::-
l s "' '
J=l
rl
where A{, and .Sjrstand ftr advertising expenditure and sales
standfor profit beforcinterestandtax
respectively of firm j in year t and n for the number of firms Where,PBI\ and,S,,
andsalesrespectivelyin firmj in periodt andn for number
in theindustry.
of firmsin theindustry.
Murketing Intenri4': Marketing intensity of industry i in year
t (MKTi) is measuredas the ratio of advertising expenditure
(ME) to sales(.1),i.e.,
ite'
MKT, =':ISn
IndustryRisk(lR):Riskin industryi in yeart(1R,,)is measured
as the standarddeviationof retum on capital ernployed
(ROCD in the industryovera periodof lastthrceyears,i.e.,
IR,,- o(ROCE,,,
ROCE'.!-r,
ROCE'r-')
whereo standsfor standard
deviation.
where ME, and Sj, stand for marketing expenditure and sales
respectivelyof firml in year t and n for the number of finns
Export Intensity:Exports intensityof industry i in year t
in the industry.
Distributitsn Intensity: Distribution intensity of industry i in
year t (D1S7l,) is measured as the ratio of distribution
e x p e n d i t u r (eD E ) l o s a l e s( S ) .i . e . .
(EXPI,,)is measured
astheratioof totalexports(EXP)to sales
(S),i.e.,
pwol
iext,,'
-j=l
I oq'
DIST,=',::tsu
Isi
where EXP,,and S,,stand for exports and salesrespectively of
firm j in year I and n for the number of Frrmsin the industry.
whereDE, and,1,,standfor distributionexpenditure
andsales
respectively
of firm j in yearr andn for the numberof firms
Import Intensity: Import intensity of industry I in year r
in theindustry.
R&D Intensiry:R&D intensityof industryi in yearr (RD,,)is
(RDE)to sales(S),
measured
astheratioof R&D expenditure
(IMP{) is measuredasthe ratio of total imports (IMP) to sales
(S), i.e.,
I'"8'
IMPI,, = !:-
'RDEil'
on
ISu
-l-l
I s,,
where IMPuand,Sj, standsfor imports and sales respectively
of firmj in year t and n forthe number of firms in the industry.
voL. 19NO.3
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