Analyzing the role of market share reallocation and average productivity improvements in aggregate productivity growth: Evidence from Indian manufacturing

This study attempts to empirically examine the importance of market share reallocation and average productivity improvements in driving aggregate productivity growth. By using Olley and Pakes, Econometrica, 1996, 64(6), 1263–1297 decomposition method, we show that aggregate productivity growth has mainly been driven by improvements in average productivity (with‐in firm productivity improvement) and not reallocation during the post liberalization phase (1999–2010) for the manufacturing sector in India. We also show that for many industries (sub‐sectors of manufacturing) the reallocation effect is negative and was driving the aggregate productivity down, compared to average productivity, which has driven the aggregate productivity up. The findings from the study confirms the important role of with‐in firm productivity improvement in aggregate productivity growth. Hence, the study emphasizes the need for positive policy interventions by the government that could enhance with‐in firm productivity growth through internal restructuring.