Barriers to Entry-A Study of Indian Manufacturing Sector

By Singh, Jasminder Pal; Kaur, Kuldip | Political Economy Journal of India, January-June 2016 | Go to article overview

Barriers to Entry-A Study of Indian Manufacturing Sector


Singh, Jasminder Pal, Kaur, Kuldip, Political Economy Journal of India


Entry of firm plays crucial role in 'Theory of Firm' and has aroused extensive interest in Industrial Economics. Entry not only helps to decrease monopoly power of incumbent firms, it helps in reducing prices, eliminates excess profit, helps in decreasing inefficiency, stimulate innovations and technical progress. Entry which is guided by factors like market structure, profit possibilities, performance and behaviour of incumbents, prevailing economy conditions, and government policies has always aroused interest of economists.

The study of entry offers a deep insight into the working of market forces. Not only the market forces but exogenous transitory factors such as policies of industrial regulation, state of economy, capital market, determines the entry to a larger extent. The main objective of this paper is to estimate the various barriers to entry in Indian context. The study is based on identification of barriers in face of changing industrial policy. The new industrial policy of July 1991 aimed at reducing barriers to entry and shifting from proactive regulatory regime to a market oriented, free, globalised environment.

Changing Face of Industrial Policy

Indian industrial sector had been protected through tariffs, quantitative restrictions, industrial licensing etc. The entry into manufacturing sector was merely governed by non-market forces during the 'license raj' and it was issued to specific groups. Overhauling of industrial and trade policies in 1980 brought changes in form of reduced barriers to entry and promotion of competition. The process of change was initiated in early 1980, but the changes were brought slowly into the system by late 1980's. The licensing procedure was streamlined and the time frame of issues of license was reduced. However, the main thrust to the reforms in the industrial sector came with the announcement of the new industrial policy in July 1991. The new policy package initiatives removes industrial licensing in all industries except those reserved for the public sector, for the SSI sector and those under compulsory licensing, subject to minimal locational conditions. Restrictions on investment by MRTP and FERA companies were also removed. The most important aspects of this policy package are: (i) Across the board de-licensing and the proposed repealing of the MRTP act, expected to reduce barriers to entry into the Indian industrial sector, (ii) A broader attitude towards foreign collaborations, technical as well as financial and especially the open door policy towards FDI, (iii) policies aimed at reforming the public sector. These policies of industrial regulation will play a major role in fostering the right market environment to increase competition and reduce barriers to entry. However, some (e g, Mani 1992, 1995) feel that the new industrial policy (NIP) is still to go a long way in fulfilling the above-mentioned objectives--which only time can tell--especially given the fact that industrial production in the recent past suffered due to import compression, rise in the cost of imports, the BOP crisis, the uncertain atmosphere on investment due to the events in 1992 and 1993. Though economic theory has recognised the importance of the influence of entry on economic performance, direct and systematic statistical evidence of factors that affect entry is meager. It is mainly because formal models of entry suffer from the problem of their lack of testable implications and most of the empirical work is based on such models which do not permit precise hypothesis testing (Kessides 1991). However, the small yet growing body of empirical literature throws some light on the various factors that affect the entry phenomenon and presents considerable evidence on the extent and barrier to entry across markets in a number of countries. Empirical work on entry has made significant contributions in the direction of recognising the long run tendencies of entry and its associations with various elements of markets structure in cross-sections of industries (e g, Orr 1974; Gorecki 1976; Hilke 1984; Kessides 1986; Baldwin and Gorecki 1987; Highfied and Smiley 1987; Schwalbach 1987; Shapiro and Khemani 1987). …

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