Trade Liberalization and Investment in Foreign Capital Goods - A Look at the Intensive Margin

Jul 19, 2026

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Evaluate how trade liberalization affects firms’ intensive margin investment in foreign capital goods using Indian firm-level panel data covering a large-scale reform period (1989–1997). The study estimates an investment equation with the system-GMM estimator and separately controls tariffs on capital goods, intermediate inputs, and final goods, enabling estimation of investment price elasticity. Results show tariff reductions on capital goods and intermediate inputs raise investment, while lower output tariffs reduce it; effects are largest for capital goods tariffs.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages46

Reading Time1 h 56 min

Abstract

Introduction

Data and Methodology

Estimation strategy (system-GMM)

Tariff breakdown (capital goods, intermediate inputs, output tariffs)

Results

Conclusion

P lubl D iic os rls reu Auor ez Pub lc D c os reisc os ru Auor ez AUTHOR ACCEPTED MANUSCRIPT FINAL PUBLICATION INFORMATION Trade Liberalization and Investment in Foreign Capital Goods A Look at the Intensive Margin The definitive version of the text was subsequently published in Emerging Markets Finance and Trade, 57(12), 2021 Published by Taylor and Francis and found at [http://dx.doi.org/10.1080/1540496X.2019.1694896](http://dx.doi.org/10.1080/1540496X.2019.1694896) THE FINAL PUBLISHED VERSION OF THIS MANUSCRIPT IS AVAILABLE ON THE PUBLISHER’S PLATFORM This Author Accepted Manuscript is copyrighted by World Bank and published by Taylor and Francis. It is posted here by agreement between them. Changes resulting from the publishing process—such as editing, corrections, structural formatting, and other quality control mechanisms—may not be reflected in this version of the text. You may download, copy, and distribute this Author Accepted Manuscript for noncommercial purposes. Your license is limited by the following restrictions: (1) You may use this Author Accepted Manuscript for noncommercial purposes only under a CC BY-NC-ND 3.0 IGO license [http://creativecommons.org/licenses/by-nc-nd/3.0/igo](http://creativecommons.org/licenses/by-nc-nd/3.0/igo). (2) The integrity of the work and identification of the author, copyright owner, and publisher must be preserved in any copy. (3) You must attribute this Author Accepted Manuscript in the following format: This is an Author Accepted Manuscript by Kandilov, Ivan T.; Leblebicioglu, Asli; Manghnani, Ruchita Trade Liberalization and Investment in Foreign Capital Goods © World Bank, published in the Emerging Markets Finance and Trade57(12) 2021 CC BY-NC-ND 3.0 IGO [http://creativecommons.org/licenses/by-nc-nd/3.0/igo](http://creativecommons.org/licenses/by-nc-nd/3.0/igo) [http://](http://)[ ](http://)[dx.doi.org/10.1080/1540496X.2019.1694896](dx.doi.org/10.1080/1540496X.2019.1694896) © 2022 World Bank Trade Liberalization and Investment in Foreign Capital Goods: A Look at the Intensive Margin ∗ Ivan T. Kandilov Aslı Leblebicioğlu Ruchita Manghnani North Carolina State University Baruch College, CUNY World Bank Abstract We evaluate the impact of trade liberalization on the intensive margin of the firm’s investment in foreign capital goods. Todo so, we use Indian firm-level panel data from a period of a large-scale trade liberalization (1989-1997) to estimate an investment equation using the system-GMM estimator. Importantly, we control separately for the tariffs on capital goods, intermediate inputs and final goods, which allows us to estimate the price elasticity of investment in foreign capital goods. Consistent with theory, we find that reductions in the tariffs on capital goods, and intermediate inputs led to higher investment in foreign capital goods, whereas reduction in the output tariff resulted in lower investment. The impact of the capital goods tariffs is the largest. JEL Classification: E22, F13, O16, O24, D92 Key Words: Trade Liberalization; Investment; India ∗ Ivan T. Kandilov is an Associate Professor, Department of Agricultural and Resource Economics, North Carolina State University, Box 8109, Raleigh, NC 27695, E-mail: [itkandil@ncsu.edu](itkandil@ncsu.edu); Aslı Leblebicioğlu (corresponding author) is the Marxe Chair in International Economics and Governance, Associate Professor of Economics, Austin W. Marxe School of Public and International Affairs, Baruch College, CUNY, Box D901, New York, NY 10010, Email: [Asli.Leblebicioglu@baruch.cuny.edu](Asli.Leblebicioglu@baruch.cuny.edu); Ruchita Manghnani, The World Bank, 70 Lodhi Estate, New Delhi 110003, E-mail: [rmanghnani@worldbank.org](rmanghnani@worldbank.org. We)[. We](rmanghnani@worldbank.org. We) are grateful to the editor, anonymous referees, and many conference and seminar participants for their helpful comments and suggestions. 1. Introduction One ofthe often e

FAQs

What question does the paper address about trade liberalization?

It evaluates how trade liberalization influences the intensive margin of firms’ investment in foreign capital goods.

What data and estimation approach are used?

The paper uses Indian firm-level panel data from 1989–1997 and estimates an investment equation using the system-GMM estimator.

How do different tariff components affect investment outcomes?

Reductions in tariffs on capital goods and intermediate inputs increase foreign capital goods investment, while reductions in output tariffs decrease investment.

Why do the authors estimate price elasticity in this setting?

Separately controlling capital-goods, intermediate-input, and final-goods tariffs allows the study to estimate the price elasticity of investment in foreign capital goods.

Jul 19, 2026

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