WORKING PAPER 15/2007
This paper analyzes the differences in the export behavior of domestic and multinational firms in the Indian auto component industry. Three types of firms are identified according to ownership: purely domestic and licensees, domestic joint ventures and joint ventures with majority stakes by the multinationals. Although all the types of firms face the same labor costs, any difference in export performances could arise because of higher productivity of labor. The paper tests whether this is true for the domestic firms and the multinational firms in the Industry. It finds that only in the case of the multinational firms, it is not just cheap labor in terms of low wage rate per worker, but low wage in relation to productivity of that labor which leads to comparative cost advantage in exports. The domestic firms are competing based on low wage cost more than the productivity of the labor. Among other factors discussed, of the reasons is the low value added nature of the components that are being exported. The role of other factors like, size, import- intensity and distribution expenses is also examined, followed by an analysis of the scope for domestic firms to become a part of the global supply chain.