An Assessment of the Relationship between Profitability and Energy Intensity for Technology Oriented Manufacturing Firms in India

Abstract

The hypothesis put forth by Porter and Linde (1995) suggests imposing regulation to promote energy efficiency can lead to improved innovation and performance among firms. This study seeks to explore this theoretical premise in the Indian manufacturing sector by analysing the influence of energy intensity on profitability of firms belonging to the Perform Achieve and Trade (PAT) regulated sectors, with a particular focus on classifying technology oriented firms. The study examines seven manufacturing industries from the first cycle of the PAT policy. Two measures of energy intensity indicators, namely the physical economic indicator and the economic indicator, are included in the study. The empirical analysis is divided into two categories: Firms that import technology (714 firms) and firms that do not import technology (752 firms). The study employs panel data analysis with a fixed effect model to conduct the analysis for the time period 2011-2020. Based on empirical analysis, it appears that firms that import technology exhibit a negative relationship between energy intensity and firm performance. Non-technology importing firms exhibit a similar relationship but with a higher coefficient value for energy intensity. The study also includes control variables such as firm size, age, capital intensity, raw material imports, and market concentration. The results show that relatively small to medium-sized firms, which are also young and striving to expand their market size, achieve energy efficiency gains. This highlights the reluctance of established players to improve their performance efficiency through technological up gradation.