Size-Competition-Productivity Nexus: Evidence from Indian Manufacturing Firms

Over the years, researches have witnessed incongruence nature and direction of relationship among product market competition and firm size with the growth of firms’ productivity across the globe. Considering these gaps, this study aims to establish both short- and long-run relationships among these three characteristics of Indian manufacturing firms and intends to find their directions of causalities. This study uses firm-level data over a period of 1998–1999 to 2012–2013. Using Panel ARDL-PMG method, the results reveal the existence of a long-run association among product market competition, firm size and productivity growth for the full sample and for subsamples, categorizing relatively efficient and inefficient firms, and innovative and non-innovative firms. From the panel VECM Granger causality test, it has been observed that there is the long-run feedback relationship among these three variables. The empirical evidence suggests that as the intensity of competition becomes stronger and the firm-specific capabilities expand, they impart improved productivity via within and between firm effects. This draws some major implications for policymakers to embrace more competitive prone policies along with encouragement to firm specificities to realise value-added productivity. JEL: C33, D24, L11, L60