Entry Liberalization and Inequality in Industrial Performance

Industrial delicensing which began in 1985 in India marked a discrete break from apast of centrally planned industrial development. Similar liberalization episodes are takingplace across the globe. We develop a simple Schumpeterian growth model to understand how…rms respond to the entry threat imposed by liberalization. The model emphasises that …rmresponses, even within the same industrial sector, are likely to be heterogeneous leading toan increase in within industry inequality. Technologically advanced …rms and those locatedin regions with pro-business institutions are more likely to respond to the threat of entryby investing in new technologies and production processes. Empirical analysis using a panelof 3-digit state-industry data from India for the period 1980-1997 con…rms that delicensingled to an increase in within industry inequality in industrial performance.[...]