CHAPTER TWO

STRUCTURE AND PERFORMANCE OF ELECTRONICS INDUSTRY

2.1 Introduction

One of the most important approaches to study industrial economics is the structure­

conduct-performance approach. The structure-conduct-performance paradigm

recognizes that the overall performance of a firm is influenced by the structure and

conduct variables. It hypothesizes that the degree of market concentration is

inversely related to the degree of competition and positively related to profit. In this

model the main causality moves from industry structure (concentration ratio)

variable to firm conduct variables (strategy) and then performance (profit) variable.

The Structure conduct performance can be understood with the help of perfect

competition and monopoly. Perfect competition is based on existence of large

number of firms, equal size, free entry and exit. Here profit is at normal level,

because its equilibrium price is determined at price equals marginal cost and average

cost. However, under monopoly the structure is high barrier to entry, and profit is

super-normal because price is above marginal cost and marginal cost is equal to

marginal revenue. In other words, as the market moves from large number of firms to

a few firms in the industry, the profitability will rise from normal level towards the

super-normal level. However, these are two extreme cases; present study does not

fall under either of these markets. In other words it falls somewhere in between. It is

oligopoly or monopolistic market condition that generally prevails in the market.

To study performance generally Price-cost margin is used; the capital turnover,

employment, technical progressiveness etc., are some of other performance variables.

The structure of an industry covers factors like, seller concentration, buyer

concentration, product differentiation and entry barriers. The concentration indices

are grouped into absolute and relative concentration measures. The absolute measure

is the concentration ratio; it is measured by a given number of large firms share in

industry's size. The other method is Herfindahl index; it is obtained by squaring and

summing the share of industry size accounted for by every firm producing for the

industry. The relative concentration is measured through Lorenz curve. The generally

used structure variables are concentration ratio and the Herfindahl index. The Buyer

concentration is the ratio of movement of intermediate products from each seller

41

industry to each of its purchasing industries (using input-output statistics) (Guth et

al., 1977). The Product differentiation is said to prevail when the buyers are not able

to identify products as perfect substitutes. Many of the study's used advertisement

intensity as the proxy for product differentiation. Barriers to entry are obstacle for

new firms to enter in market for sales and production. It may be in the form of legal

obstacles, buyer loyalty, absolute cost advantages, economies of scale etc. The

conduct of firms covers the price-setting behaviour and the behaviour of rivals. The

commonly-used conduct variables are Research and Development, product

differentiation (advertisement), capital intensity, age of the firm, export intensity,

capital import intensity etc.

The Structure conduct performance model was initiated by S. Mason of Harvard in

1939 and elaborated by numerous scholars in the field of industrial organization

(Scherer and Ross, 1990; Sarah, 2003)1• Mason's study was focused on behaviour of

firms; latter it was shifted to industrial behaviour. Some of these concepts were

already found during 1925-40. Bain's has contributed to carrying forward of

scientific analysis and introduction of a proper shape. His seminal paper (1951) was

based on an analysis of the performance of US firms in 42 industries in the latter half

of the 1930; it found abnormal profits in relatively more concentrated industries than

those of relatively un-concentrated industries. This has helped to form the structure

conduct and performance paradigm. His articles 'Barriers to new competition' (1956)

and 'Industrial organisation' (1959) has strengthened structure conduct performance

paradigm. He emphasized that concentration is an important determinant of market

power and profitability.

During the 1960s, the structure conduct performance was modified and improved by

Mann (1966) and Wilson and Commonor (1967). Their results support Bain's

hypothesis. They modified and tested it by incorporating various variables of market

structure and conduct (Joseph, 1997). However, Demsetz (1973 and 1974) of

Chicago school approach has presented alternative explanation for abnormal

performance presented by Bain (1951). He stated that the abnormal result was due to

1 Sarah Sijses, "Structure, conduct and performance in the international chain of Jepara-made furniture, 2003", source: Internet; CR. Scherer and Ross (1990) Industrial market structure and economic performance, 3rd edition, Houghton Mifflin company, Boston.

42

efficiency of firms, not the presence of collusive behaviour and pricing.2 Another

study by Brozen ( 1970, 1971) argued that Bain' s analysis was static and data may

have depicted diseq~ilibrium situa.tion. His analysis found that the level of abnormal

profit declined over the period; he therefore emphasised his disequilibrium argument.

Esposito and Esposito (1971) improved the model by incorporating import and

export variables. Porter (1979) also contributed by incorporating some of strategic

variables. Later studies, notably Bothwell, Cooley and Hall's (1984), have

introduced risk adjustment variables to the rates of profit of firms in different

industries.

Criticism

The structure-conduct-performance approach is a short-run static one. With

particular structure firms are seeking to maximize profit, subject to a constraint of

limiting entry into the industry. Caves (1967) argued that there is a causation

relation, i.e. market structure determines the behaviour of firms, and behaviour

determines the performance of firms. However, the performance of firms may be

determined by outside the influence of participating firms. The omission and mis­

specification of variables may lead to mis-interpretation of result.

Demsets (1973 and 1974) argues that the abnormal profits may be the result of the

higher level of efficiency of firms, not the collusive behaviour or pricing. Brozen

(1970, 1971) argued that Bain's analysis was static and that Bain's data may have

reflected a disequilibrium situation. He found that the level of abnormal performance

declined over time.

Some of the variables of structure of industry, viz., advertisement, number of firms

etc., are determined by a series of historic accidents, which are not directly relevant

to current conduct and performance. The past conduct and performance of firms may

act as barriers for new firms. Maximization of profit and reinvesting in research and

development activity and advertisement heightens the existing barrier.

Contrary to the SCP hypothesis, the performance may influence structure of firm.

High profitability and expansion of sales would increases the size of firms. The

conduct variables may smoothen the entry of a firm into the industry influencing

2 He suggested testing the relation between structure and performance between firms of different sizes and their rates of return relative to industry average. He argued that larger size firms are more efficient than the smaller firms.

43

structure of industry. Departures from profit maximization may arise from

managerial strategies such as sales revenue maximization.

Technical factors determine the industrial structure, particularly the size of plant,

number of firms, the degree of concentration etc. The minimum efficient scale of

production (technical factors) plays a major role in moulding the structure of the

industry. Some of the variables are elements of structure, of conduct and of

performance; they may cause simultaneous equation problem, i.e. Advertisement.

The SCP model was initially developed in the United States, where the private sector

dominates the market. The same model may not be applicable in developing

countries or in mixed economies, where industrial activities are determined and

planned by the government. Government also determines foreign direct investment,

foreign participation, industrial licensing that moulds the structure of industry. India

consists of large-scale public sectors, whose objective is employment generation

rather than profit maximization. So, performance of firms is not completely

determined by market. Therefore, profit level may stabilize or decline at high level of

concentration through fear of government intervention.

The objective of this chapter is to study performance (price-cost margin) and

determinants of performance. To study this various conduct variables and structure

variable are used.

It has extended to study in detail structure (Herfindahl index) of electronics industry

both at aggregate and disaggregate level viz. consumer, industry, computer,

communication and component electronics. Further, attempt has been made to

analyse the relation between price-cost margin, wage share and excise duty.

The plan of the chapter is as follows. Section 2.2 opens with the relevant hypothesis

of factors affecting performance (price-cost margin) in electronics industry. This is

followed by specification of the model and source of data in Section 2.3. In Section

2.4, empirical findings of performance and structure have been analysed. Electronics

industry's concentration ratio (Herfindahl index) has been analysed both aggregate as

well as disaggregate level in Section 2.5.

It is followed by analysis of relation between price-cost margin, wage share and

excise duty in Section 2.6. Finally, the summary of findings is given in Section 2.7.

44

2.2 Factors Affecting Performance (price-cost margin): Hypotheses

It hypothesizes that the degree of market concentration is inversely related to the

degree of competition and positively related to profit. In this model the main

causality moves from industry structure (concentration ratio) variable to firm conduct

variables (strategy) and then performance (profit) variable. To study performance

(price-cost margin) and its relation with structure and conduct, various conduct

variables and structure v.ariable are used. Therefore the factors that are considered to

explain performance of firm are discussed below:

Firm Size

Larger firms with considerable resource bases (both financial and real) will have a

resource and scale advantage in investing in Information Technqlogy industry (Lal

K, 1995). The larger firms are more efficient than the smaller firms because the

former has comparative advantages over the latter in terms of technical factors,

managerial factors, marketing factors, financial factors etc. The Electronics industry

is capital intensive in nature and the larger firms are better suited than the smaller

firms. The larger the firm the more the division of labour in the production process,

which enhances the productivity and reduces the cost of production. Firms gain from

the arrangement of having different heterogeneous processes housed under the same

roof. It does away with certain vital costs like marketing costs, transportation costs,

heating and cooling costs and packaging costs etc. The potential management cadre

in the large size firms can handle the market problems more efficiently. The vast

majority of the companies in developing countries are small and they face problems

in raising capital. Many of the public sector companies are large in size. Large

companies appear to have relatively greater reliance on the capital market. Large

companies' access to sources of finance may have greater implication on structure

and competition of industry, and it enables to squeeze smaller companies particularly

in times of financial problems. The larger firm can handle sudden or unforeseen

demands or emergencies by maintaining equipment, stocks, cash, labour etc. The big

firms have power over suppliers, competitors and customers. It can force the

suppliers to charge lower input prices than those which are justified by the cost of

production. The larger firms can make use of their waste products economically

because of being available in greater quantities. It may use such products themselves

or make them available for others in some ancillary trade.

45

Singh and Whittington (1975) have classified separately twenty-one industry groups

and all firms together and found that the degree of dispersion of profitability

decreased with size of firm. Devine et al. (1985) found that the larger firms in

general experience less variability of profit rates than do smaller firms. Samuels

(1965) has examined a sample of 400 firms quoted on the London Stock Exchange

over the period 1950-51 to 1959-60 and found that larger firms grew at a

significantly faster rate than smaller firms, and that the degree of variability of

growth within a given size class did not differ between larger and smaller firms.

Hymer and Pashigian (1962) has examined the relationship between firm size and

growth rate for the 1000 largest US manufacturing firms over the period 1946-55,

and they found that the average growth rates did not differ for firms of different sizes

but that there was a systematic tendency for variance to decrease with size. On the

basis of the above explanation the Price-Cost margin of Indian electronics industry is

postulated to be positively related to the firm size.

Research and Development

Inventions are made because there is need for them. Radio, television and computer

are made with some purpose. Through invention, innovation and commercial

exploitation man controls the environment. Invention, innovation and imitation are

the successive stages in industrial research and development activity. Invention as

'an idea, a sketch or a model for a new or improved device, product, process or

system and an innovation in the economic sense is accomplished only with the first

commercial transaction involving the new product, process, system or device'

(Freeman, 1982). The cost associated with Innovation is much more than the cost

associated with the invention. Lloyd (1970) indicates that costs associated with

invention are only of the order of 10 per cent of the total costs of innovation and

invention. Invention and innovation are risky and important part of the industrial

activity. An invention provides an opportunity to gain more profit for those firms

which adopt it. But once the other firms use this innovation, it may become obsolete,

so many of the firms do not sell their invention. For those firms which do not

innovate, demand for those products may disappear; this may put pressure on the

firms to engage in research and development activity. Innovation has some character

of public goods; once it is introduced, it is difficult to prevent other firms from

46

getting access to it. So, the inventors are protected through patent laws, which give

certain rights over the use of their invention for a specified period.

The large firm favours research and development because of its economies of scale.

The firms often may become large because of research and development activity; in

other words, research and development investment and profits are positively

associated. Freeman (1982) concludes that R&D programmes are highly

concentrated in a relatively few firms. In the study, firms with over 5000 employees

accounted for 90 per cent of all industrial R&D expenditure in the USA and for

around 75 per cent in West Germany and the UK. In contrast, the vast majority

(around 95 per cent) of small firms (with less than 200 employees) do not have any

specialized research programme. Scherer (1965) finds some tendency for research

intensity to first rase and then fall with firm size. But Soete (1979), examining data

for the USA in the 1970s, found some tendency for R&D intensity to continue to"

increase with firm size even amongst the largest firms. Empirical study by Kamien et

al. (1982) over fifteen years have shown that, although there may sometimes be

certain advantages of size in exploiting the fruits of R&D, it is more efficiently done

in small or medium-size firms than the large ones. Blair (1972) has found some

evidence based on American lawsuits that some large firms have tried to withhold

inventions, because new inventions threaten the viability of existing products. This

evidence shows large laboratories tend to produce minor inventions. Profit generates

funds for R&D expenditure and R&D expenditure generates profit and provokes

market position (Lall, 1980; Manfield, 1969; Galbraith, 1972; Grabowski, 1968).

In this study R&D has been measured R&D expenditure over the sales. Adoption and

adaptation of the domestic technology is less expensive than the foreign technology.

This independent attitude boosts the confidence of domestic entrepreneurs. With the

help of domestic R & D firms can replace obsolete products with new products

according to the changing environment which ultimately helps to increase the profit.

Hence, holding other things constant it is postulated that higher the R & D

expenditure the more the Profit.

Technology Import

It is often discussed that developing countries import the technology from the

developed countries, resulting in a mismatch between the technological requirements

of the former and the available technology (Pack et al., 1969). Developed countries

47

are capital abundant and labour scarce; on the contrary developing countries are

labour abundant and capital scarce. Since, innovation of technology is capital

intensive, most of the invention and innovation takes place in developed countries.

To protect technology, they often resorted for Prohibitive tariff and patents. Gallini

(1984), Katz and Shapiro (1986), Kamien and Tauman (1986) and Muto (1990) have

studied technology licensing and its implication on the R & D of the potential

entrant. They emphasised that once the technological trade takes place then there

would be no difference among the firms. Some of other studies by Desai (1988),

Alam (1985) and Kabiraj (1990) have examined and found that the factors such as

small market size, low demand and payment constraints may result in trade of

second-hand know-how. As far as the technology leader and buyer are concerned,

they concluded that the reason for not selling advance technology to buyers is the

threat of the entry of technology buyers into their (technology leaders') existing

market network.

The liberalization and globalization policies have reduced tariff rate and import and

export of technology has become common phenomenon. This has encouraged

developing countries to purchase foreign technology from the developed countries

and helped to compete in the international market. Developing countries have their

own advantages in terms of availability of resources, abundant labour; by adopting

foreign technology it can produce the products at lower cost than the developed

countries. For the developing countries invention and innovation is a time­

consuming process and products become obsolete as and when the new products are

invented. So, even developing countries resort to import of technology rather than

depending on domestic research and development.

Therefore, import of technology is postulated to be positively associated with profit.

Capital Intensity

The electronics industry is capital intensive in nature. Capital stock consists of

machinery, tools, factory buildings and all kinds of industrial plants, raw material

etc. Development of an industry depends on these factors. In the Pre-liberalization

period gross fixed capital formation was mainly public investment, so the public

sectors enjoyed a degree of autonomy and gained major share of profit. The public

sector electronics firms are large in size and so experiences economies of scale.

Liberalization of economy encouraged private sectors (including foreign firms) to

participate in the industry. This has resulted in the increase of the overall capital

stock of the economy. Any cost reduction achieved in the capital goods industry is

48

always capital saving for the economy as a whole. Studies by Rosenberg (1963) and

Lall (1995) suggest that the use of Information technology results in the saving of

capital per unit of output. Since Electronics firms are highly capital intensive, it

would result in lower cost of production, more amount of output and higher profit

margin. Thus, the capital intensity is predicted to have a positive impact on profit.

Advertising

Marketing can be broadly defined to include all aspects of selling the product once it

leaves the plant where it is made. The product may be differentiated by distinctive

packaging, distinctive taste, distinctive sales outlet, and distinctive after-sales

service. Advertising is a means to influence the tastes and opinions in the direction of

their prodl!cts. Consumers will not know about firms' products unless they are told

(Donald A Hay et al., 1991 ). It is an efficient means by which producer spread the

information that the products is introduced in the market. Consumers have different

tastes and preferences for the products and they are not aware of the location from

where the products are available, price of the product and other product

differentiation. Advertisement helps to solve these problems and provide for easy

access. There is a relation between the amount of advertisement the firm does and the

potential market who will receive the information (Stigler, 1961 ). In the monopolistic

market it is used as an instrument of barrier to the rival firms, thereby enabling firms

to fix higher price and reap high cost margin. The more the investment in

advertisement, the more the product differentiation; it helps to reduce the absolute

value of the elasticity of demand and increases the price-cost margin. In Structure

conduct Performance, advertisement is seen as an element of conduct, structure and

also performance variable. As a conduct variable it influences the profit; it can also

behave as a part of performance influenced by industrial structure. So, this variable

may create simultaneous equation problem. Here advertisement is taken as a conduct

variable, expecting that advertisement positively influence the price-cost margin.

Structure

Structure (Concentration) is regarded as an important element in the Structure

conduct and performance paradigm. The concentration ratio shows the market power

and explains whether the industry is highly concentrated or low in concentration. The

features of the structure have been suggested by Bain, viz., Degree of seller

concentration, Degree of buyer concentration, Degree of product differentiation and

height of barriers to entry into the market. Structure can be measured with

49

Concentration ratio, Herfindahl index and Lorenz curve. The structure-performance

model hypothesizes that particular types of market structure is associated with

particular type of behaviour and influences the performance of the industry.

The earlier empirical work of Profit and concentration is done by Prof.. Bain. Using

eight-firm concentration ratios (CR8) for a sample of 42 US four-digit industries, he

found that after-tax profits as a percentage of shareholders' equity averaged 11.8 per

cent for those sectors with a CR8 greater than 70 per cent, compared with an average

of 7.5 per cent for sectors with lower concentration. This implied the positive

relationship between concentration and profitability (Donald A Hay et al., 1991).

Schwartzman (1959) carried out a study ofUSA and Canadian industries using profit

margins as the dependent variable, and found them to be significantly higher in more

concentrated industries. Collins and Preston's (1968) study using data from 1956-60

and 1963 with price-cost margins as the dependent variable revealed a positive

relation between concentration and the price-cost margin. Weiss (1974) tabulated and

reviewed around 46 concentration-profitability studies; a majority of these, using

regression analysis, found concentration to be a statistically significant determinant

of profitability. But Weiss' further study shows the weakened relationship between

concentration-profits and justified that this relation may possible in the period of

accelerating inflation. However, the results were questioned by Curry and George

(1983) provide a summary of 17 studies in which 15 studies found to have a negative

impact on changes in concentration (i.e. faster growth led to lower rises in

concentration). Therefore, Concentration is postulated to be positively associated

with price-cost margin.

Export Intensity

The promotion oflndia's export is an important objective of economic liberalization,

but India's export is not satisfactory in electronics hardware sector. Product cycle

theory (Vernon's 1966) explains that initially foreign production moved to other

countries because of cost competitiveness and servicing the host and third country

markets. Eventually, production shifted to the developing countries which may offer

competitive advantage as a production location. Most of the developing countries are

labour intensive and abundant in natural resources but scarce in capital. Foreign

participation in special economic zones and export processing zones increases cost

competitiveness which in tum strengthens export. According to Kojima (1978),

50

foreign investments are export-oriented and are designed to feed home country

demand. Cost of production is high in home (developed) country; this problem can

be sorted out by establishing a branch in developing country for supply of

intermediate goods. Ozawa (1992) emphasizes that the export-platform production

overseas by MNEs keeps moving from country to country on the basis of changing

factor costs. Frobel et al. (1980) emphasize foreign investment is intra industry

specification between the countries. MNEs locates certain types of manufacturing

operations away from home bases-especially to developing countries-to make use

of abundant supply of skilled and low wage labour (Kumar, 2002). LDCs enjoyed a

competitive advantage only in low and medium tech industries. However, enterprises

in medium tech industries with good R & D base networking with overseas firms for

technology imports and market information have been successful in their export

orientation (Willmore, 1992; Athukorala et al., 1995; Haddad et al., 1996;

Sidharthan, 2002).

The above theoretical explanation shows the importance of export and its

determinants, particularly foreign capital. It is interesting to expect relation between

greater export and profit in the electronics industry. India has strong competitors, viz.

East Asian and South East Asian countries which have liberalized much earlier. India

has all the advantages that these (East Asian) countries have; therefore, it can be

hypothesized that there is positive association between export and profit.

Impact of Liberalization

The argument for infant industry protection is an argument for temporary state

intervention to develop nation's industry and to protect from foreign competition.

However, the liberalization of the Indian economy has lead to reduction in the

protection of Indian industry; in other words it has been encouraging foreign

participation. Al-Saadon and Das (1996) refer to a situation where no-commitment

on the part of the local government turns out to be a better strategy than

commitmene. Planning should be made at central level and common policies should

be implemented all over the country without any hindrance from local government.

The ability of the local government to alter tax rates or reduce tax rates and

encourage joint venture (JV) agreement induces the MNC to offer a better share to

3 Here the author restricts government intervention to only in industrial activity. However, in social, security sector government participation is very much essential.

51

the local firm4• Grossman (1984) stated that very few countries would ever

consciously wish to specialize in unsi).illed labour, in other words they prefer for

skilled or trained labour. Foreign firms with a comparative advantage in

entrepreneurship, management, skilled labour and capital took over these functions,

replacing inferior 'local talent'. It may hinder employment growth but increase

output growth.

Above definitions emphasizes the importance of liberalization of the economy. The

learning process may be so long that the domestic entrepreneur may not be able to

catch up the foreign counterpart in the short period. Liberalisation helps in the

transfer of knowledge and its diffusion in the economy. This is very essential in the

electronics industry because it is technology intensive, and through knowledge

spillovers it can upgrade the existing technology. Hence, Liberalisation dummy is

expected to increase price-cost margin.

Central Excise Duty

Tax policies and incentives extended by the government have their impact on

production, employment, profit etc. The liberalization and globalization policies

reduced excise duty encouraged domestic private sector and attracted multinational

enterprises. The objective is to strengthen capital base, utilize domestic resources

optimally, generate employment and to be competitive in the international market.

India has skilled manpower but is scarce in capital resource unlike other developing

countries, viz. East and South East Asian countries. Though these countries were also

labour intensive, yet domestic policies have attracted foreign capital, making them

capital abundant countries. If electronics firms are to be competitive in the

international market domestic policies have to be in favour of private enterprises.

Thus, Central Excise Duty is hypothesized to be inversely associated with Profit.

Age of Firm

Age is an important factor for performance of firm. Age of firm is considered as a

proxy for learning by doing. The older companies are expected to have more

accumulated experience. The proportion of older capital dominates in the old firms;

new capital is less. The product quality of old firms are likely be poorer than the

product quality of new firms (Anita Kumari, 2008). However, it is value addition

4 Nirvikar singh and Sugata margit (eds.) Joint Ventures, International investment and Technology transfer, Oxford university press, New Delhi, 2003.

52

over the years that make the firms more competitive. The older firms maintain the

brand image by supplying qualitative products to the customers. As the demand for

the products increases, the profit margin also increases and surplus profit is re­

invested for the expansion of the company, Research and Development, hiring

skilled labour, use of better technology etc. This results in the economies of scale and

given output can be produced at lower cost, which will increase the Price-Cost

margin.

Since, electronics industry is technology intensive, and technology becomes obsolete

very fast, Age of the firm is postulated to be negatively associated with profit.

Capital Import Intensity

Capital inte;nsity improves price-cost margm of firms, and profit performance

depends not only on quantity of capital but also quality of capital. Indian firms

collaborate with foreign companies with a view to strengthen existing capital.

Developed companies or branded companies refuse to extend their capital to

developing countries. However, the cost of production is low in developing countries

because of availability of resources and abundant labour. Developed countries can

exploit these resources and make profit by adopting their capital. So the capital

import fills the gap of capital scarcity and improves the economies of scale.

Therefore, capital import intensity is postulated to have a positive association with

profit performance of electronics industry.

Foreign Participation

As explained in literature, in the pre-reform period the infant industry argument was

adopted, allowing the state to intervene to develop the nation's industry and protect it

from foreign competition. However, economic reforms reduced the protection and

encouraged foreign participation. Foreign firms play a dominant role in the export

performance in developing countries (UNCTAD, 2002), which in turn increases

profit of firms. The ability of the local government to alter tax rates after the joint

venture (JV) agreement is signed induces the MNC to offer a better share to the local

firm (Nirvikar and Margit, 2003). Incentive for foreign participation ushers in a

competitive environment through entrepreneurship, management, skill labour, capital

stock and foreign technology. MNEs' market access and brand image improves

demand for the products. Several empirical studies emphasises foreign participation

for better performance (Sun, 2001; Liu and Shu, 2003). Other studies have shown

53

that foreign firms' p~icipation is to focus on host countries market rather than the

export.

Hence, foreign participation is assumed to be have a positive association with profit

performance.

2.3 Specification of the model and Source of Data

2.3.1 Model

Price-Cost Margin= f(Capital intensity, Firm size, Research and Development, Age

of firm, Import of technology, Capital import intensity, Central excise duty,

Advertisement intensity, Concentration ratio, Liberalisation dummy, Foreign

dummy).

2.3.2 Source of Data

Our primary source of data is PROWESS, compiled by the Centre for Monitoring

Indian Economy (CMIE). This data set covers the period from 1989 to 2007. The

liberalization dummy takes 0 if it belongs to the period 1989 to 1993 as pre-reform

and 1 if it belongs to 1994 to 2007 as post-reform period. The Foreign firm dummy

takes 1 if it belongs to the foreign company and 0 otherwise.

2.4 Empirical Findings of Performance and Structure of Electronics

Industry

Capital Intensity

Capital intensity and Profit are positively related and it is statistically significant at

five per cent level. It implies that the Indian electronics firms' probability as well as

propensity to profit is greater among relatively higher capital intensive firms. The

above result could have resulted from the following factors. Higher capital intensity

is the result of long-term accumulation of capital and technology. Capital stock

consists of machinery, tools, factory buildings and all kinds of industrial plants, raw

material etc. During the pre-liberalization, period gross fixed capital formation was

mainly public investment; so the public sectors enjoyed a degree of autonomy and

gained major share of profit. Since the public sector electronics firms are large in

size, they experienced economies of scale. However, the post-reform period

encourages private sector including MNCs. This has resulted to increase the overall

54

capital stock of the economy. It results in higher product quality and reduction of

marginal cost of production and increased profit margin.

Export Intensity

The coefficient of export intensity is positive with the Price-Cost margin and

statistically significant at five percent level. The explanation possibly lies in the fact

that India may be increasing and expanding a number of world class infrastructures

like SEZ and EPZ (required for the electronics hardware sector). This has been

initiated to compete in the international market particularly with East and South East

Asian countries. Since SEZ and EPZ are exempted from tariff duties the whole of the

earnings goes to the entrepreneur. This increases profit margin and induces

reinvestment and expansion of capital base. India's liberalization policies are

attracting private sector and MNEs, which in tum is resolving the problem of capital

scarcity. Many of the MNCs are established in India to utilize resources that are

available at lower cost and to serve either the parent company or the world market

that results in the increase of export of electronics goods.

Table 2.1

Structure Conduct Performance paradigm

Dependent variable PCM Coefficient Constant .6I5978 (2.93) Cap lnt .0787 (2.29) ** Exp lnt .1360352 _(1.9TI_ ** Firm Siz .OOI87 (0.58) R&D .I079096 (0.08) Age -.OOI707 ( -O.I83)_ Imp Tech . 67032 (1.99) ** Cap Imp Int I.425433 (0.05) Excise duty -.002983 (-1. 79) *** Adv int -.358750 (-1.621 Structure .007575 (1.80) *** LibD .156I26 (1.981 ** Foreign D .3679202 _(1.79) *** No. ofobs 2I69 No. of groups 206 Wald chi2 (II) II 02.99 Prob >chi 2 0.0000 R-sq: overall 0.5286

Z values in parentheses, *=statistically significant at I%, ** = Statistically significant

at 5%, ***=statistically significant at IO%

55

Technology Import

There is positive relationship between import of technology and profit and it is

statistically significant at five percent~ge level. The possible explanation would be

that domestic research and development is not sufficient to compete in international

market. For the developing countries invention and innovation is the time-consuming

process and products become obsolete as and when new products come into the

market. Import of technology from developed countries, fills the gap of technology

between the technological requirements of the developing countries and availability

of technology in developed countries. India has its own advantages in terms of

availability of resources, abundant labour, and by adopting foreign technology it can

produce the products at lower cost than the developed countries. This in turn

increases profit margin of electronics firms.

Excise Duty

Excise duty and profit margin comes out as strong in the empirical analysis. Tax

policies and incentives extended by the government have their impact on profit. The

liberalization and globalization po~icies reduced excise duty encouraged domestic

private sector and attracted multinational enterprises. The objective is to strengthen

capital base, utilize domestic resources optimally, and generate employment and to

be competitive in the international market. Further reduce in excise duty increases

profit margin of enterprises.

Structure

As expected, the relationship between profit and concentration is positive and

statistically significant at ten per cent level. This results supports Bain (1951 ),

Schwartzman (1959), Collins and Preston (1968) and Weiss (1974). The results

explain that barriers against new entry can be seen to play a crucial role in

determining profit of existing firms. When there are barriers to entry, existing firms

can raise profit above the average level without inducing new firms' entry into the

market. Existing firms prefer long run profits; so, they keep price at low level and

enjoy command over the production of goods. However, concentrated firms gain

profit above average.

56

Impact of Liberalization

The relationship between liberalisation and profit is positive and statistically

significant at five per cent level. This implies that during the post-reform period

profit margin is increasing in electronics industry. This explains that the

liberalization policy, by encouraging Special Economic Zones, Export Promotion

Zones, Research and Development hub, Import of technology, Capital etc., have

been playing a vital role to develop the Indian electronics industry and obtain more

profit. Liberalisation helps the transfer of knowledge and its diffusion in the

economy. India is a developing country; so, invention and innovation is a time­

consuming process and it becomes obsolete as and when the new products are

introduced in the market. Economic liberalisation allows import of capital and

technology from developed countries and facilitates the filling of the gap between the

technological requirements of the developing countries and availability of technology

in developed countries. This has resulted for profit gain during the post-reform

period.

Foreign Participation

As expected, foreign firms' participation and price cost margm are positively

associated and significant at ten per cent level. Economic reforms reduced the

protection and encouraged foreign participation. Foreign firms are entering the

Indian market either through equity shares or establishing their own branches. Their

objectives differ: to serve their parent company, to capture host country market, or to

compete in international market. Some firms follow all the strategies with a objective

of profit maximisation. Joint ventures with MNCs facilitate obtaining of capital,

technology, skill, business strategy etc. MNEs' market access and brand image

improves demand for the products. These factors ultimately lead to increase of profit

margm.

Insignificant variables

Size

The relationship between firm size and profit in the Indian electronics industry

comes out as weak in the empirical analysis. Firm Size comes out with insignificant

coefficient. It shows that the firm size doesn't affect the profit margin. A firm,

whether large or small, has its own advantages. The larger firms can absorb the

57

economies' unforeseen emergencies by maintaining equipment, stocks, cash, labour

etc. The big firms have control over suppliers, competitors and customers. On the

other hand, smaller or moderate firms would be flexible enough to adjust to the

economic fluctuations and can change production strategy, skill base and resources

according to demand for the products.

Research and Development

On contrary to expectation, there is insignificant and positive relation between R &

D intensity and Profit. It appears from the result that the Indian economy is not

emphasizing domestic technology (invention and innovation). Domestic research and

development is very essential to expand its base in the domestic market and then it

would not be difficult to compete in the international market. Many of the firms

established as hardware companies are involving in the software sector due to higher

profit margin. However, the large domestic market for hardware sector is inducing

companies to remain in hardware production. To be competitive in international

market research and development base is very important. The possible reasons for

insignificant relation between R & D investment and profit would be that only the

public sector companies established after independence are large-scale industries and

emphasized more on R & D activity. Indian science and technology institutions and

universities have been playing a major role in invention and innovation. However, it

has not been utilised optimally, because of import of technology would be available

at lower price than the domestic research and development. India has all the

advantages that China, East and South East Asian countries have, in terms of capital,

skilled labour, vast productive land, establishment of special economic zones and

export processing zones, but quality of infrastructure and suitable government policy

are not at par with these countries, to protect interest of private and foreign

entrepreneurs. Firms are gradually shifting from China to South East Asian countries

(Malyasia) and the development of R & D hub in India would atract these firms to

India.

Some of the other variables, viz. age, excise duty, advertisement intensity are

negatively related and firm size and R&D are positively associated but insignificant.

58

2.5 Electronics Industry's Concentration Ratio (Herfindahl Index)

The above analysis reveals that the price-cost margin is positive and significant with

structure (concentration ratio) capital intensity, export intensity, R&D, import of

technology, liberalization dummy and foreign dummy. However, Age, excise duty

and advertisement intensity are negatively associated but insignificant. Structure is

an important factor influencil)g performance of a firm. This section covers the

concentration (three firms) ratio of electronics industry at aggregate level as well as

at disaggregate level.

Market power permits higher levels of price-cost margin; it can be measured with

concentration ratio and the existence of barriers to entry (economies of scale, cost

advantages etc).5 Concentration may behave as a barrier against new entry. First,

high level of concentration may reflect as a high degree of firm-level economies of

scale. Therefore it functions as firm-level economies of scale. Second, new entry

firms may consider highly concentrated industry as more likely to take concerted

action against entry than a low concentration industry would.

2.5.1 Aggregate Electronics Industry

The Herfindahl index shows that the concentration of electronics industry has been

decreasing gradually due to the economic reforms. The pre-reform period saw

increase in the concentration in electronics industry. During the pre-reform period

the electronics industry was dominated by the public sector. During the post-reform

period till the year 1997 there was drastic decline; however, from 1998 it increased.

Immediate after reform the Indian private sector entered the electronics industry,

reducing the power of some of the large scale firms. Concentration ratio has recorded

slight declined thereafter except for the years 2001 and 2002. Further liberalization

of economy has encouraged MNEs, and their entry or establishing firm6 depends on

5 Impediments to entry into an industry can arise from factors specific to the industry concerned and from factors arising in the capital market.

6 MNEs' entry is properly panned. Initially they preferred to enter the industry through equity participation rather than establishing their own firms. Already existing firm has its own advantage in terms of R&D base, capital, market strategy etc. It helps foreign firms to capture domestic market in a short period. However, further liberalization of economy and establishment of SEZs, EPZs, EHP (Electronics hardware parks) etc., have been attracting foreign firms to establish their own branch.

59

the advantages they obtain. in India compared to other countries. In other words their

entry is properly planned7•

Table 2.2

Electronics Industry's Concentration Ratio (Herfindahl Index) Aggregate

Electronics Industry

year H index 1989 35.83

1990 54.91

1991 29.34

1992 31.96

1993 24.15

1994 23.25

1995 18.75

1996 16.46

1997 17.16

1998 19.31

1999 19.02

2000 19.57

2001 16.33

2002 23.24

2003 19.81

2004 19.20 . 2005 16.62

2006 18.79

2.5.2 Electronics Industry Concentration at Disaggregate Level

The decline in the concentration in the communication electronics is much more than

the other electronics industry8. Decline in the concentration of communication

electronics is followed by the component, computer and the industrial electronics.

The consumer electronics industry is the only industry which is comparatively

constant; there is slight decrease during the 1990s and an increase thereafter at same

rate. During the pre-reform period the concentration has been increasing m

communication, component and computer electronics and a decline thereafter.

8 ITI {Indian Telecommunication Industry) was the largest industry in India. However, private sector participation particularly MNEs in the field of telecommunication has reduced its power and often loss is incurred. So, the competition has been increasing in the telecommunication industry.

60

Consumer and industrial electronics started declining during the pre-reform period;

the declining trend has continued during the post-reform period.

Table 2.3

Electronics Industry Concentration at Disaggregate Level

year Consumer Industry co~puter Communication Component

1989 33.77 20.67 30.98 64.06 29.68

1990 21.84 19.13 56.05 93.23 84.33

1991 22.97 19.37 10.85 75.69 17.84

1992 22.70 16.88 79.40 18.66 22.15

1993 20.39 14.17 19.07 56.98 10.13

1994 18.18 10.99 25.80 48.82 12.47

1995 19.51 10.45 20.75 30.86 12.19

1996 19.34 12.45 22.41 17.08 11.02

1997 18.93 13.01 22.15 22.01 9.72

1998 19.19 16.19 19.54 31.38 10.24

1999 19.39 14.82 17.88 33.25 9.78

2000 20.53 17.04 18.38 29.07 12.81

2001 18.44 14.55 13.38 24.00 11.27

2002 20.43 12.46 43.42 24.62 15.28

2003 31.67 10.00 21.38 19.22 16.75

2004 22.21 10.18 23.34 16.55 23.72

2005 22.39 9.25 19.08 14.58 17.80

2006 27.18 8.76 24.42 13.51 20.10

2.6 Relation between Price-Cost Margin, Wage Share and Central

Excise Duty

The above analysis reveals that the structure (Herfindahl index) has been decreasing;

in other words, electronics industry has been experiencing more competition. Here

we shall examine the relation between price-cost margin, wage share and central

excise duty.

In the previous section we have examined determinants of price-cost profit. Here

Profit is a dependent variable and independent variables are Capital intensity, Export

intensity, Firm size, R & D, Age of firm, Technology import, Capital import

intensity, Excise duty, Advertisement, Structure, Liberalisation dummy and Foreign

61

dummy. This section analyses relationship among Price-cost margin, Wage share and

Central excise duty. It begins with explanation of these concepts.

Price-Cost Margin

Profit is defined as the differences between total costs involved in making or buying

goods and the total income accruing from its sales. It may also be explained as price

per unit sold would be greater than the average or marginal cost. Accordig to Hawley

and A.C. Pigou, profit is a reward for risk and responsibility of entrepreneur9•

Disagreeing with this, Frank Knight (1922), stated that profit is a reward for

uncertainties rather than the risks which are known in advance. Similarly J.B. Clark

(1899) defines Profits as a dynamic surplus; the more the changes in the economy the

more the profit. In a stationary economy where no changes in conditions of demand

and supply occur, the prices paid to the factors of production on the basis of marginal

productivity would exhaust total value of production and no profit would accrue to

the entrepreneur. When the selling prices of goods exceed the cost of production the

profit increases. According to Stigler, Firms in a competitive industry can receive

profit because of a state of disequilibrium; these profits can arise even if all

entrepreneurs are identical, for disequilibrium can characterize a whole industry.

According to Joseph Schumpeter profit is a result of innovation. He has linked the

policy with the innovation. Any policy which reduces the cost of production and

increases the demand for the products is an innovat!on.

Strong case for profit occurrence is attributed to the monopoly, which is featured as

uneven size distribution, economies of scale, product diversification, patent, barriers

to entry, licensing, advertisement, etc. The opposite of monopoly is perfect

competition, where there is no scope for abnormal profit. As the market moves from

having a large number of firms to a few firms in the industry, the profitability will

rise from the normal level towards the super-normal profits. However, these are two

extreme cases; our study falls into neither of these markets. In other words it falls

somewhere in between. It is oligopoly or monopolistic market condition that

generally prevail in the market.

9 Here the author mentions risk factors, viz. holding of the assets, stock of materials and finished products, technological changes, price levels, marketing etc.

62

Central Excise duty

Tax policies and incentives extended by the government have its impact on

production, employment, wage, profit etc. In other words, higher excise duty has

negative impact on profit, employment and wages of labour. The liberalization and

globalization policies reduced excise duty with a view to encourage domestic private

sector as well as to attract multinational enterprises. The other objectives are to

strengthen capital base, utilize domestic resources optimally, generate employment,

and be competitive in the international market.

India has skilled manpower but is scarce in capital resource unlike other developing

• countries, viz. East and South East Asian countries. Though these countries were also

labour intensive, yet their favourable domestic policies have attracted foreign capital;

in the process they have become capital abundant countries. To enable electronics

firms to be competitive in the international market, domestic policies must favour

private enterprises.

Wages

Firms are expected to increase employment if their unit labour costs are decreasing

rather than increasing (Sharma, 2006). 10 The cost of capital with respect to labour

cost determines the employment growth. Employers who use more fixed capital per

worker reduce the number of employment but as the demand for labour increases,

they prefer casual, contract (non-regular) workers. This is because non-regular labour

cost is considered to be lower than regular labour. So, wages play a major role in

determining the profit of an entrepreneur.

10 Alakh N Sharma's (2006) study shows that in the case of total employment, 49 per cent of the sample firms which reported either an increase or decrease in labour cost, increased manual employment and employment is inversely related to the fixed capital per worker.

63

2.6.1 PCM, Wage Share and Central Excise Duty - Aggregate Electronics

Industry

Table 2.4

Aggregate Electronics Industry

Aggregate Electronics Industry

year CED PCM wageshare

1989 0.57 2.41 3.23

1990 0.61 2.19 2.62

1991 0.60 2.05 2.41

1992 0.79 2.25 1.99

1993 0.63 2.32 2.32

1994 0.55 2.56 1.91

1995 0.51 2.47 1.81

1996 0.54 2.49 2.13

1997 0.52 2.70 2.22

1998 0.50 2.48 2.29

1999 0.55 2.55 2.29

2000 0.52 2.63 2.15

2001 0.49 2.52 2.42

2002 0.53 2.61 2.48

2003 0.47 2.46 2.87

2004 0.42 2.76 3.33

2005 0.41 2.59 3.47

2006 0.42 2.61 3.15

2007 0.45 2.40 2.16

64

Figure 2.1

Aggregate Electronics industry 4 .. ·························································~··-······· ... ............................... ·············-·-·······-··········-··············-.. ·········

3.5

3

2.5

2

1.5

1

0.5

-CEO

-PCM

-wageshare

-linear (CED)

- Linear (PCM)

-linear (wageshare)

Analysis of price-cost margin of electronics industry at the aggregate level reveals

that there is a rise in the price-cost margin after economic reforms which allowed

trade and industry to participate at international level. This is broadly in agreement

with the results of Srivastava et al. (2001) and Goldar (2004). The income share of

the labour in value added is also rising. On the other hand the central excise duty has

been continuously decreasing. This suggests that the fall in the central excise duty

has resulted in raising not only the price cost margin but also the wage share of the

labour. The trend shows the price-cost margin and the wage share together

decreasing till 1992, whereas after 1992 to 2005 both are increasing; later both then

start decreasing. The wage share remains higher than the profit during the pre-reform

period whereas profit is higher than wage share during the post-reform period and it

continues till 2003. During the post-reform period till 2003 the profit and wage share

are inversely related; it may be that the labour power in terms of bargaining power

was lower than the pre-liberalization period. This reveals that the economic

liberalisation through labour reform reduced the labour power. The Multinational

Enterprises' entry either through equity participation or establishing their companies

has led to the rise in the share of the labour wages and they kept their profit margin

low to compete in the Indian market. Electronics industry requires skilled labour; to

attract highly skilled or trained labour foreign firms paid high wages. Firms targeting

65

long-run profit keep their profit margin at low level. This is clearly borne out by the

present study.

After 2005 the profit margin declines; the wage share also follows same path. On the

other hand, central excise duty has been declining continuously.

2.6.2 PCM, Wage Share and Central Excise Duty - Disaggregate Electronics

Industry

Table 2.5

Disaggregate electronics industry

Consumer Electronics

year CED PCM wage

1989 0.11 0.41 0.55

1990 0.12 0.27 0.43

1991 0.13 0.30 0.33

1992 0.12 0.33 0.28

1993 0.10 0.33 0.32

1994 0.08 0.33 0.32

1995 0.08 0.36 0.25

1996 0.08 0.37 0.28

1997 0.07 0.37 0.29

1998 0.08 0.40 0.25

1999 0.08 0.38 0.25

2000 0.08 0.43 0.33

2001 0.08 0.43 0.38

2002 0.08 0.49 0.40

2003 0.08 0.36 0.19

2004 0.07 0.39 0.26

2005 0.07 0.43 0.32

2006 0.05 0.46 0.32

2007 0.06 0.46 0.24

Consumer Electronics

During the reform period the consumer electronics industry has been experiencing an

inverse relation between its profit and wage share. As the profit increases the wage

share decreases. On the other hand, during the pre-reform period though both were

66

continuously declining the wage share remains higper than the profit, and the profit

touches a low much earlier than the wage share. This clearly explains that the trade

unions were much stronger in the pre-reform period than in the post-reform period.

On the other hand, Central excise duty is declining continuously. The benefit from

the decline in the Central excise duty is reaped by the entrepreneurs alone. ·In other

words, it is not shared with the labourers. As the classical economists explain

entrepreneurs' surplus will be reinvested in industrial activity and the capital

accumulation takes place, and this will lead to the growth and development of the

industry. So there is possibility of growth and development of consumer electronics

industry in India.

Table 2.6

Industrial Electronics

year CED PCM Wage

1989 0.09 0.47 0.44

1990 0.09 0.45 0.43

1991 0.08 0.40 0.35

1992 0.08 0.38 0.49

1993 0.09 0.44 0.44

1994 0,07 0.49 0.42

1995 0.06 0.49 0.43

1996 0.06 0.48 0.46

1997 0,07 0.53 0.50

1998 0.05 0.58 0.45

1999 0.06 0.56 0.51

2000 0.05 0.55 0.50

2001 0.05 0.46 0.53

2002 0.04 0.48 0.47

2003 0.05 0.50 0.55

2004 0.05 0.47 0.59

2005 0.05 0.47 0.61

2006 0.05 0.47 0.48

2007 0.04 0.44 0.51

The decline in the Central excise duty resulting to the increase in the Wage share.

This is a contrast to the consumer electronics industry. The increase in the wage

share is much more than the increase in the profit. Till 1998, the average wage share

is lower than the profit, but after 1998 the average wage share increases much more

than the profit. In other words, the overall increase in the wage share is much more

than the increase in the profit, though both increase. This implies that the benefit

67

obtained by decline in the central excise duty is shared by both the entrepreneur and

labour, though the labour share is much more than the profit of the entrepreneur.

During the pre lib~ralisation period both the profit and the wage share are declining.

During the post-reform period the wage share experience a increasing trend and

profit has declined after the year 2005. It implies that Industrial electronics industry's

labour union is much stronger than consumer electronics industry.

'

Table 2.7

Computer Electronics

_year CED PCM wage 1989 0.04 0.56 0.91 1990 0.08 0.43 0.48

1991 0.04 0.31 0.46

1992 0.07 0.55 0.29

1993 0.05 0.62 0.26

1994 0.04 0.67 0.28

1995 0.04 0.63 0.24

1996 0.04 0.65 0.26 1997 0.03 0.66 0.34 1998 0.05 0.50 0.37 1999 0.06 0.53 0.41 2000 0.05 0.54 0.39 2001 0.04 0.59 0.43 2002 0.05 0.59 0.51 2003 0.05 0.61 0.53 2004 0.05 0.62 0.46 2005 0.04 0.54 0.48 2006 0.02 0.55 0.50 2007 0.04 0.46 0.46

In the computer electronics industry, the profit and the wage share are inversely

related to the central excise duty. As the Central excise duty decreases the Profit and

the wage share are increasing. The profit share is much more than the wage share.

During the post-reform period the profit share and the wage share are almost

inversely related. In other words, as the profit share increases the labour share

decreases and vice versa. During the pre-reform period, the wage share remains high,

whereas in the post-reform period profit share remains higher than the labour share.

In the year 1995 the labour share recorded a low and the profit remains high. In the

computer industry the difference between labour share and the profit is very high, but

68

later it is reduced and convergence occurs. It reveals that since computer is a highly

competitive product and there is large domestic demand for it there exist an

understanding between the labours and the entrepreneur. This is very essential

because East and South East Asian countries are in a dominating position in this

industry. China and Malaysia have specialized in this industry; large scale electronics

hubs are located in these regions. India has all the advantages that these regions have;

so there are possibilities that these established MNEs will shift from China to

Malaysia and from Malaysia to India. Another important factor is that India is known

for its software sector; to develop the software sector, the hard ware sector is very

essential. The growth of software sector will be hindered by a complete dependence

on the import of hardware. So, hardware base is very essential and there should be

proper understanding between employer and labour in the sharing of the total

revenue.

Table 2.8

Communication Electronics

year CED PCM wage

1989 0.03 0.40 0.48

1990 0.04 0.38 0.44

1991 O.o3 0.39 0.41

1992 0.13 0.39 0.23

1993 0.03 0.36 0.43

1994 0.03 0.41 0.38

1995 0.05 0.35 0.57

1996 0.07 0.28 0.72

1997 0.06 0.28 0.64

1998 0.04 0.27 0.70

1999 0.09 0.34 0.59

2000 0.08 0.35 0.50

2001 0.06 0.38 0.62

2002 0.05 0.38 0.55

2003 0.04 0.44 0.76

2004 0.05 0.38 1.60

2005 0.05 0.41 1.62

2006 0.03 0.44 1.17

2007 0.02 0.67 0.78

69

The communication electronics industry has been experiencing an increase in profit

and wage share. There is slight decrease in the central excise duty. Pre-liberalization

period profit is higher than the wage share, and during the post-liberalization period

the wage share remained not only high but also increased drastically. This reveals

that the Profit and the wage share are almost inversely related. The increase in the

profit is very less compared to the increase in the wage share. It reveals that the

major share of the profit is taken away as the share of the labour. It also explains that

to be competitive at the global level, profit has to be kept at minimum level and

skilled labour maintained by paying high wage. This problem could be solved by

increasing the capital intensity through the import of capital and technology.

Table 2.9

Component Electronics

year CEO PCM wage

1989 0.18 0.20 0.30

1990 0.20 0.24 0.30

1991 0.17 0.30 0.32

1992 0.25 0.27 0.17

1993 0.21 0.28 0.29

1994 0.14 0.33 0.23

1995 0.14 0.32 0.22

1996 0.13 0.29 0.26

1997 0.13 0.29 0.31

1998 0.11 0.30 0.30

1999 0.11 0.26 0.38

2000 0.09 0.32 0.27

2001 0.10 0.29 0.29

2002 0.10 0.32 0.25

2003 0.09 0.35 0.23

2004 0.09 0.44 0.19

2005 0.09 0.36 0.30

2006 0.08 0.34 0.32

2007 0.07 0.40 0.25

In the component electronics industry the profit is not only inversely related to the

wage share but also with the central excise duty. In other words as the Central excise

70

duty is decreasing there is a slight decrease in the wage share and the increase in the

profit. During the pre-liberalization period the average profit is lower than the

average wage share; due to the impact of liber(!.lization, the average profit has been

increasing continuously and the wage share has been decreasing. The difference

between profit and wage share is quite hi'gh in the year 1995 and 2004. But the

difference in the year 2004 is much more than the remaining years.

It shows that the electronics industry's profit is inversely related to the wages and

Central excise duty. The trend of the profit and the wage share are reversed due to

the impact of liberalization policy.

Summary

In this chapter, the analysis focused on the electronics industry's market behaviour

through structure-conduct-performance paradigm, during pre- and post-reform

period. Further, analysis continues importance of structure (Herfindahl index)

variable at aggregate and disaggregate level. Disaggregate level consists of consumer

electronics, industrial electronics, computer electronics, communication electronics

and component electronics industry. Finally, the analysis continued to look at the

relation among price-cost margin, wage share and central excise duty. The main

findings of the study are summarized below:

Study of S-C-P paradigm or determinants of price-cost margin has been carried out

by estimating panel data regression equation, Random Effect, and GLS method. The

analysis shows that structure, capital intensity, export intensity, import technology,

liberalisation dummy and foreign dummy are positively significant. Central excise

duty is negatively significant. These results implies that the economic reforms leads

to increase in capital stock, import of technology, foreign participation, export

processing zones etc. Liberalisation of economy helps in the transfer of knowledge

and technology diffusion in the economy. It allows import of capital and technology

from developed countries and facilitates the filling of the technological gap. Joint

ventures with MNCs facilitate obtaining of capital, technology, skill, business

strategy etc. MNEs' market access and brand image improves demand for the

products. The structure (concentration ratio) is also found to be positively associated

with profit. These factors resulted in profit gain during the reform period.

71

Some of the other variables, viz. age, advertisement intensity are negatively related

and firm size and R&D are positively associated but insignificant.

The Herfindahl index shows that the concentration of electronics industry has been

decreasing gradually due to the economic reforms. The pre-reform period has

experienced increase in concentration in the electronics industry. During the pre­

reform period electronics industry was dominated by public sector. During post­

reform period till the year 1997, there has been a drastic decline; it increased in the

year 1998. Immediate after the reform period the Indian private sector entered the

electronics industry, reducing the power of some of the large scale firms.

Concentration ratio has recorded a slight decline thereafter except during the years

2001 and 2002. Further liberalization of economy has encouraged MNEs and their

entry or establishment of firms resulting in the further reduction of the concentration

ratio.

The decline in the concentration in the communication electronics is much more than

the other electronics industry. Decline in the concentration of communication

electronics is followed by the component, computer and the industrial electronics.

The consumer electronics industry is the only industry which, comparatively,

remained constant; there is a slight decrease during 1990s and an increase thereafter

at same rate. During the pre-reform period the concentration has been increasing in

communication, component and computer electronics and a decline thereafter.

Consumer and industrial electronics started declining during the pre-reform period

and the declining trend has continued even during the post-reform period.

Analysis of price-cost margin of the electronics industry at the aggregate level

reveals that there is a rise in the price-cost margin after economic reforms. The

income share of labour in value added is also rising. On the other hand, the central

excise duty has been continuously decreasing. This suggests that the fall in the

central excise duty has resulted in the rise not only of the price cost margin but also

the wage share of the labour. The trend shows the price-cost margin and the wage

share together decreasing till 1992, but from 1992 to 2005 both increase; later both

started decreasing. The wage share remains higher than the profit during the pre­

reform period whereas profit is higher than wage share during the post-reform period

and it continues till 2003. During the post-reform period ti112003 the profit and wage

72

share are inversely related; may be the labour power in terms of bargaining power

was lower than the pre-liberalization period. This reveals that the economic

liberalisation, through labour reform reduced the labour power. The Multinational

Enterprises' entry may have led to the rise again the share of the labour wages; they

kept their profit margin low to compete in the Indian market.

Consumer Electronics

During the reform period the consumer electronics industry has been experiencing an

inverse relation between its profit and wage share. Though both were continuously

declining during the pre-reform period the wage share remains higher than the profit.

This clearly explains that the trade unions were much stronger in the pre-reform

period than in the post reform period. The benefit from the decline in the Central

excise duty is reaped by the entrepreneur alone.

Industrial Electronics

In contrast to the consumer electronics industry, decline in the Central excise duty

resulted in the increase in wage share. Till 1998, the average wage share is lower

than profit, but after 1998 the average wage shares increases much more than profit.

This implies that the benefit obtained by the decline in the central excise duty is

shared by both entrepreneur and labour, though the labour share is much more than

the profit of the entrepreneur. It implies that Industrial electronics industry's labour

union is much stronger than consumer electronics industry.

Computer Electronics

As the central excise duty decreases the Profit and the wage share increases. During

the pre-reform period, the wage share remains high, whereas in the post-reform

period the profit share remains higher than the labour share. Later the differences get

reduced and convergence takes place. It reveals that since computer is a highly

competitive product and there is large domestic demand for the computers, there is

an understanding between the labours and the entrepreneur. This is very essential

because East and South East Asian countries have a dominant position in this

industry. Another important factor is that India is known for software sector; to

develop the software sector, the hard ware sector is very essential. The growth of

software sector may be hindered by complete dependence on the import of hardware.

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So, hardware base is very essential and there should be proper understanding

between employer and labour in sharing the total revenue.

Communication Electronics

There is slight decrease in the central excise duty. Pre-liberalization period profit is

higher than the wage share, and during the post-liberalization period the wage share

remained high. This reveals that the Profit and the wage share are almost inversely

related. The increase in profit is very less compared to increase in wage share. It

reveals that the major share of profit is taken away as the share of the labour. It also

explains that to be competitive in global level, profit has to be kept at minimum level

and skilled labour maintained by paying high wage. This problem could be solved by

increasing the capital intensity through the import of capital and technology.

Component Electronics

As the central excise duty decreases there is a slight decrease in the wage share and

increase in profit. During pre-liberalization period the average profit is lower than the

average wage share. Liberalization led to continuous increase in the average profit

and the decline in wage share. It shows that the electronics industry's profit is

inversely related to the wages and central excise duty.

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