Swati Dhingra of London School of Economics and Political Science reviews, “Reforms and Economic Transformation in India” edited by Jagdish Bhagwati and Arvind Panagariya. The Econlit abstract of this book begins: “Nine papers explore economic policy reforms in India and consider why their impact has not been as significant as it has been in other reform-oriented economies. Papers discuss labor regulations and firm size distribution in Indian manufacturing; complementarity between formal and informal manufacturing in India—the role of policies and institutions; services growth in India—a look inside the black box; organized retailing in India—issues and outlook; selling the family silver to pay the grocer's bill?—the case of privatization in India; variety in, variety out—imported input and product scope expansion in India; reforms and the competitive environment; the postreform narrowing of inequality across castes—evidence from the states; and entrepreneurship in services and the socially disadvantaged in India. Bhagwati is University Professor of Economics and Law at Columbia University. Panagariya is Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy at Columbia University.”

Firms face competing needs to expand product variety and reduce production costs. Access to larger markets enables innovation to reduce costs. Although firm scale increases, foreign competition reduces markups. Firms' ability to recapture lost markups depends on the interplay between within-firm competition and across-firm competition. Narrowing product variety eases within-firm competition but lowers market share. I provide a theory detailing the impact of trade policy on product and process innovation. Unbundling innovation provides new insights into welfare gains and innovation policy. Product innovation increases welfare beyond standard gains from trade. The relative returns to innovation policy change with trade liberalization. (JEL D24, F13, O31)

Empirical work has drawn attention to the high degree of productivity differences within industries and their role in resource allocation. This paper examines the allocational efficiency of such markets. Productivity differences introduce two new margins of potential inefficiency: selection of the right distribution of firms and allocation of the right quantities across firms. We show that these considerations affect welfare and policy analysis, and market power across firms leads to distortions in resource allocation. Demand-side elasticities determine how resources are misallocated and when increased competition from market expansion provides welfare gains.

Resource-based theories propose that firms grow by diversifying into products that use common capabilities. We provide evidence for common-input capabilities, using a policy that removed entry barriers in input markets to show that the similarity of a firm’s and an industry’s input mix determines firm production choices. We model industry choice and economies of scope from input capabilities. When the model is estimated for Indian manufacturing, input complementarities make firms 5% more likely to produce in an industry and are quantitatively as important as time-invariant drivers of coproduction rates. Upstream entry barriers were equivalent to a 9.5% tariff on inputs.