Determinants of Domestic Value Added in Exports: Empirical Evidence from India’s Manufacturing Sectors

Abstract

Over the last decade, trade policy reforms have significantly influenced the internationalization of Indian manufacturing firms, leading to deeper participation of the country in global value chains (GVCs) and international production networks (IPNs). With the growing participation of foreign firms in the value chain, the domestic value-added (DVA) content embodied in Indian exports have displayed a declining trend. Recently, in 2020, India has decided to launch the ‘Atmanirbhar (self-reliant) Bharat Abhiyan’, which, in principle, aims to consolidate the manufacturing sector, leading to increasing DVA embodied in exports (DVA-content), apart from employment generation. The current article attempts to analyse the drivers of India’s DVA in exports for select manufacturing industries over 2000–15 by using the OECD trade in value added (TiVA) database. The empirical results reveal that sectoral DVA content is positively influenced by both domestic capital and foreign direct investment (FDI), and labour skill intensity, but negatively influenced by the presence of unskilled workers. Moreover, FDI inflows in sectors characterized by high skill-intensity and high-relative growth rate play a crucial role in influencing DVA content. Finally, the presence of larger and more capital-intensive firms is found to be a major driver of DVA. On the policy front, therefore, the empirical results underline that export promotion policies alone will not be able to resolve employment worries, a major concern in India, as vast numbers of unskilled and low-skilled workers trapped in the agricultural sector or working in unorganized and micro-industries fail to figure in the country’s export value addition. A concerted effort towards labour skill enhancement as well as technology transfer is necessary for exports to play a more positive role.