Does Rising Energy Prices Lead to Production Fragmentation? An Example from Indian Manufacturing Industries

Abstract

How does the price of energy affect the extent of production fragmentation in India’s manufacturing industries? The prevailing literature has engaged with production fragmentation and trade in middle products for a long time, but the relationship between energy prices and production fragmentation is less understood. This article deals with firm-level panel data of India’s manufacturing industries between 2005 and 2018 to estimate the impact of rising energy prices on the outsourcing decisions/production organization of the manufacturing firms. The article also uses a number of covariates, including wages, welfare expenses, sales, profit after tax, dividend rate, foreign exchange earnings and an interaction term between energy prices and foreign exchange earnings. The empirical results of this article indicate that larger firms tend to outsource production in part to smaller firms in order to cope with rising energy prices and keep their profitability intact. Static and dynamic panel estimates with a variety of robustness analyses support the main conjectures.

JEL Classification: F18, L23, Q410, Q500

Keywords

Production fragmentation outsourcing energy prices manufacturing industry panel data

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