The Impact of Trade Liberalization on Micro Enterprises: Do Banks Matter? Evidence from Indian Manufacturing

This paper looks at the impact of trade liberalization on micro enterprises with differential access to banks. I use Indian data on rural micro enterprises employing less than ten workers in the manufacturing sector to find that trade liberalization, measured by a fall in the tariff, is associated with a larger increase or a smaller decrease in output, capital–labour ratio and labour productivity in districts with a larger number of bank branches per capita. Evidence is consistent with strong complementarities between trade liberalization effects, and the economic dynamism and access to financial intermediation associated with greater bank presence in the enterprise's location. The study underscores that trade liberalization can be beneficial to micro entrepreneurs under certain conditions and emphasizes reallocation resulting from trade liberalization. The study hence highlights the role for development policy in exploiting gains from trade.