Abstract:

Industrial delicensing which began in 1985 in India marked a discrete break from a past of centrally planned industrial development. Similar liberalization episodes are taking place across the globe. We develop a simple Schumpeterian growth model to understand how Örms respond to the entry threat imposed by liberalization. The model emphasises that Örm responses, even within the same industrial sector, are likely to be heterogeneous leading to an increase in within industry inequality. Technologically advanced Örms and those located in regions with pro-business institutions are more likely to respond to the threat of entry by investing in new technologies and production processes. Empirical analysis using a panel of 3-digit state-industry data from India for the period 1980-1997 conÖrms that delicensing led to an increase in within industry inequality in industrial performance.