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Intensive and extensive margins of exports: What can India learn from China?

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Lakshmi Aerath discusses India’s export performance in manufactured products during 2000–15 into changes at the intensive and extensive margins.

Image courtesy of interviewee. May 30, 2024

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The study focuses on India's export performance and identifies key strategies and policy interventions needed for achieving higher export growth, particularly in the context of the Make in India program initiated in 2014 to establish India as a global manufacturing hub. A central comparison is made with China, a successful exporting country, particularly due to its extensive trade relationships and specialization in labor-intensive manufacturing.

The research analyzes India's exports of manufactured products from 2000 to 2015, breaking it down into two components: intensive and extensive margins. Results indicate that while both countries perform better in the intensive margin (referring to growth from established markets and products), China's success is primarily driven by quantity rather than price, with China's quantity margin significantly exceeding India's. Conversely, India's lack of penetration into richer markets is attributed to its specialization in skill-intensive and capital-intensive products instead of labor-intensive ones, where it holds a competitive advantage.

The paper concludes that India must enhance its intensive margin by focusing on labor-intensive manufacturing to access richer markets, rather than merely diversifying exports across numerous products and markets. Policy recommendations include removing constraints and fostering integration into global production networks to fully exploit India's export potential and create employment opportunities. Ultimately, a stronger emphasis on the intensive margin is deemed more beneficial for India's export growth than broad diversification.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

00:00.355 --> 00:01.575
The primary focus

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of the study is India's export performance,

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and, we look at what strategies

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or what policy interventions are essential to,

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for India to achieve, higher export growth.

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And, the topic of export growth is especially,

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the, the topic of,

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export growth is especially relevant in the context

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of the Macon India program that was launched in 2014

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by the government of India.

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The key objective of that program was to establish India

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as a global manufacturing hub.

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This brings us to the comparison between India and China,

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because China is already a very successful exporting

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country, particularly in manufactured products.

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Um, China's also a natural source of comparison for us

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because of the, similarities

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that these two countries share, whether it be in terms

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of the economic size

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or, the, the relative,

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factor abundance in these two countries.

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So India and China are both huge,

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labor abundant countries.

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Um, what we do here is we bring in the concept of intensive

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and extensive margins.

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So we are interested in knowing whether overall export

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growth, does it stem from, intensive margin

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or from the extensive margin,

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because these things will tell us.

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Um, two, two different things as far as,

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you know, policy is concerned.

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Uh, so if, if, say we find

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that the extensive margin contributes more

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to overall export growth, then it means

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that diversification is important.

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So it's important to diversify into newer markets,

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forge relationships with newer countries,

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and also start exporting newer products.

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Um, on the other hand, if we find

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that the relative contribution

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of the intensive margin is more, then it, it means that

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strengthening trade relationships with existing set

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of partner countries and in the existing set

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of products is more important.

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Um, so what we do in the paper is we decompose India's

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export of manufactured products for the period 2000 to 2015,

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into extensive and intensive margins.

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And then we compare and contrast the

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results, with that of China.

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Uh, doing this, we are able to understand,

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where China has done well.

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Is it because of intensive margin growth or is it

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because of diversification, the extensive margin growth?

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Um, and we are able to say the same for India.

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Where is India lagging?

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Is it because of intensive margin or, or, or

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because of, you know, less diversification?

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Um, we are also able to answer, the question,

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what has led to China's export success?

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What are some of the important reasons why China has

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Been able to,

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do exceptionally well in manufacturing exports?

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Um, what are the lessons

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that India can learn from China's experience?

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What are some of the policy measures that we can adopt,

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so that India becomes a successful exporting country?

03:14.985 --> 03:18.605
So these are some of the, key questions that we try

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to address in our paper.

03:20.105 --> 03:24.565
We use the gravity model to understand some of the, key

03:25.125 --> 03:26.965
determinants of export performance.

03:27.505 --> 03:31.405
Uh, first we, by using the gravity gravity model,

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we are able to quantify the India China gap,

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particularly along, the intensive and extensive margin.

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Um, after that, we ask the question, okay,

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what are the potential explanations for the India China gap?

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Uh, what are some of the factors, that have led

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to China's export success?

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And here we make some very important findings.

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We find that China's exchange rate policy is not the prime

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reason for its export success,

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particularly along the intensive margin

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and the quantity margin.

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Um, neither is it due to, the volume

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of FDI inflows into China.

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Uh, the key reason for China's export success,

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and the India China gap is China's

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export orientation

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and trade relationships with the richer country markets

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or the, the traditional developed, country markets.

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So this is what we find in our regression analysis.

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We find that across all product categories within

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manufacturing, whether it be chemicals,

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missionary transport equipment, any manufacturing,

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product category that you take, across all of these,

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you see the India China gap is widest,

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along the intensive margin, not the extensive margin.

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Um, the, along the extensive margin.

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Although China does better than India,

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the difference is not as much.

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Um, if you look at the intensive margin gap there, you see

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that China does better than India by about four times.

05:11.025 --> 05:13.005
So to understand the reason for this,

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what we do is we further decompose,

05:15.635 --> 05:18.805
intensive margin into price and quantity margin.

05:19.345 --> 05:22.605
So intensive margin growth can be,

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because of a price increase or a quantity increase,

05:25.525 --> 05:26.765
or a combination of both.

05:27.265 --> 05:30.165
So what we do is by analyzing

05:30.705 --> 05:34.085
the export unit values, and,

05:34.425 --> 05:37.765
and, looking at the price margin, what we find is that,

05:38.265 --> 05:41.005
on average, both Indian products

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and Chinese products are sold at a price lower than that

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of the rest of the world.

05:46.425 --> 05:47.885
But the key point here is

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that Chinese products are sold at a price even

05:51.085 --> 05:52.365
lower than that of India.

05:53.265 --> 05:56.925
Uh, which means that, China's

05:57.005 --> 05:59.925
Price margin is not the reason for its high,

06:00.155 --> 06:01.605
intensive margin growth.

06:01.715 --> 06:02.845
It's the quantity margin

06:02.865 --> 06:04.805
that's playing the, the important role.

06:05.505 --> 06:07.525
And, the India China gap,

06:07.825 --> 06:10.045
if you look at the quantity margin there, you'll see

06:10.045 --> 06:13.645
that China does about nine times better than India.

06:13.905 --> 06:17.325
So that's where you, you find the stock contrast

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between these two countries.

06:19.555 --> 06:22.685
What what happens in India is that India is unable

06:22.705 --> 06:26.765
to achieve higher intensive margin growth despite having a

06:26.765 --> 06:29.085
higher price margin because of very low levels

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of quantity margin.

06:30.505 --> 06:33.445
And also the quantity margin is not growing at all

06:33.445 --> 06:35.165
during our period of analysis.

06:35.555 --> 06:38.685
What we find in the paper is that China's,

06:38.985 --> 06:43.125
export orientation with high income countries is,

06:43.305 --> 06:47.325
the key reason for, the higher intensive margin growth

06:47.385 --> 06:49.245
and the quantity margin, growth.

06:50.215 --> 06:53.405
India, on the other hand, has failed to,

06:53.875 --> 06:57.165
exploit its export potential in richer country markets

06:57.195 --> 07:00.805
because of the, distorted pattern of specialization.

07:00.825 --> 07:03.325
You know, this idiosyncratic pattern of specialization

07:03.715 --> 07:05.405
that India has been engaging in.

07:05.745 --> 07:08.325
Uh, so if you look at India's pattern of specialization,

07:08.585 --> 07:11.045
you see this move away from,

07:11.125 --> 07:12.565
labor intensive manufacturing

07:13.265 --> 07:16.005
and a bias towards skill intensive,

07:16.035 --> 07:17.805
capital intensive commodities.

07:18.345 --> 07:20.965
Um, whereas China,

07:20.965 --> 07:23.485
because of, its integration

07:23.635 --> 07:26.685
with the global production networks and, and

07:26.685 --> 07:30.685
because China is this assembly hub for manufacturing,

07:30.945 --> 07:34.445
by specializing in labor intensive commodities, which is

07:34.445 --> 07:36.965
where its true, comparative advantage lies,

07:37.415 --> 07:38.885
China thus is able

07:38.905 --> 07:42.525
to penetrate deep into the richer country markets, which is

07:42.525 --> 07:45.285
where there is, a demand for these kind of products.

07:45.655 --> 07:46.765
India, on the other hand,

07:46.765 --> 07:49.765
because of lack of specialization in labor intensive

07:49.835 --> 07:53.125
commodities, has failed to,

07:53.795 --> 07:55.685
penetrate into the richer country market.

07:55.825 --> 08:00.405
So here we, use this, categorization

08:00.405 --> 08:01.925
where we decompose,

08:02.165 --> 08:04.965
manufactured products into different categories based on the

08:04.965 --> 08:06.045
factor intensities,

08:06.065 --> 08:08.445
and that's how we come up with this finding.

08:08.995 --> 08:13.725
What we understand from, our, research is

08:13.725 --> 08:17.085
that for India to boost its exports,

08:17.135 --> 08:19.925
India must focus on the intensive margin.

08:20.505 --> 08:23.525
Uh, only then will it be able to,

08:23.635 --> 08:27.605
penetrate into the richer country markets, which means

08:27.605 --> 08:31.045
that there needs to be a reorientation in its trade

08:31.065 --> 08:32.405
specialization pattern.

08:33.105 --> 08:36.125
Uh, India must focus on labor intensive manufacturing,

08:36.175 --> 08:38.805
which is where its comparative advantage lies.

08:39.465 --> 08:42.365
Um, so the, the point that we are trying

08:42.365 --> 08:44.645
to make in the paper is that all

08:44.645 --> 08:47.525
of the extensive margin is important,

08:47.855 --> 08:49.085
going by the estimates.

08:49.105 --> 08:50.805
We find that for both India

08:50.945 --> 08:53.005
and China, it's the intensive margin

08:53.005 --> 08:54.525
that has contributed more to,

08:54.945 --> 08:57.645
Uh, overall, export growth for, for China.

08:58.185 --> 09:01.045
So there needs to be, we, we need

09:01.045 --> 09:04.765
to rethink about the policy focus on export diversification.

09:05.505 --> 09:09.325
Um, what, what we need to do is,

09:09.325 --> 09:13.405
rather than spreading your exports thinly across several

09:13.525 --> 09:14.845
markets and products,

09:15.235 --> 09:17.925
that doesn't really serve the purpose if there is no

09:18.035 --> 09:19.965
substantial increase in volume.

09:20.145 --> 09:22.045
So that's why we, we say that, you know,

09:22.045 --> 09:24.765
intensive margin growth is more important than

09:25.105 --> 09:26.565
export diversification.

09:27.105 --> 09:31.765
Uh, so what policy needs to do is,

09:31.985 --> 09:33.125
remove constraints

09:33.505 --> 09:38.445
and create an environment which, will enable India

09:38.705 --> 09:43.245
to integrate more into the global production networks,

09:44.585 --> 09:48.685
by which it can then u utilize economies of scale,

09:49.015 --> 09:51.485
specialize in labor intensive commodities,

09:51.945 --> 09:53.645
and, you know, thereby create jobs.

09:53.745 --> 09:55.285
And there are a lot of other spillover

09:55.285 --> 09:56.645
effects by, by doing this.

09:56.705 --> 09:58.765
So contrary to general perception,

09:58.815 --> 10:02.405
there is a tremendous potential if India were to

10:02.995 --> 10:05.165
intensify its trade relationships

10:05.555 --> 10:07.205
with richer country markets.

00:00 - The primary focus of the study is India's export performance, and, we look at what strategies or what policy interventions are essential to, for India to achieve, higher export growth. And, the topic of export growth is especially,

00:20 - the, the topic of, export growth is especially relevant in the context of the Macon India program that was launched in 2014 by the government of India. The key objective of that program was to establish India as a global manufacturing hub. This brings us to the comparison between India and China, because China is already a very successful exporting country, particularly in manufactured products. China's also a natural source of comparison for us

00:51 - because of the, similarities that these two countries share, whether it be in terms of the economic size or, the, the relative, factor abundance in these two countries. So India and China are both huge, labor abundant countries. what we do here is we bring in the concept of intensive and extensive margins. So we are interested in knowing whether overall export

01:17 - growth, does it stem from, intensive margin or from the extensive margin, because these things will tell us. two, two different things as far as, you know, policy is concerned. so if, if, say we find that the extensive margin contributes more to overall export growth, then it means that diversification is important. So it's important to diversify into newer markets,

01:46 - forge relationships with newer countries, and also start exporting newer products. on the other hand, if we find that the relative contribution of the intensive margin is more, then it, it means that strengthening trade relationships with existing set of partner countries and in the existing set of products is more important. so what we do in the paper is we decompose India's export of manufactured products for the period 2000 to 2015,

02:19 - into extensive and intensive margins. And then we compare and contrast the results, with that of China. doing this, we are able to understand, where China has done well. Is it because of intensive margin growth or is it because of diversification, the extensive margin growth? and we are able to say the same for India. Where is India lagging? Is it because of intensive margin or, or, or

02:45 - because of, you know, less diversification? we are also able to answer, the question, what has led to China's export success? What are some of the important reasons why China has Been able to, do exceptionally well in manufacturing exports? what are the lessons that India can learn from China's experience? What are some of the policy measures that we can adopt, so that India becomes a successful exporting country?

03:14 - So these are some of the, key questions that we try to address in our paper. We use the gravity model to understand some of the, key determinants of export performance. first we, by using the gravity gravity model, we are able to quantify the India China gap, particularly along, the intensive and extensive margin. after that, we ask the question, okay, what are the potential explanations for the India China gap? what are some of the factors, that have led

03:50 - to China's export success? And here we make some very important findings. We find that China's exchange rate policy is not the prime reason for its export success, particularly along the intensive margin and the quantity margin. neither is it due to, the volume of FDI inflows into China. the key reason for China's export success, and the India China gap is China's

04:22 - export orientation and trade relationships with the richer country markets or the, the traditional developed, country markets. So this is what we find in our regression analysis. We find that across all product categories within manufacturing, whether it be chemicals, missionary transport equipment, any manufacturing, product category that you take, across all of these, you see the India China gap is widest, along the intensive margin, not the extensive margin.

04:56 - the, along the extensive margin. Although China does better than India, the difference is not as much. if you look at the intensive margin gap there, you see that China does better than India by about four times. So to understand the reason for this, what we do is we further decompose, intensive margin into price and quantity margin. So intensive margin growth can be, because of a price increase or a quantity increase,

05:25 - or a combination of both. So what we do is by analyzing the export unit values, and, and, looking at the price margin, what we find is that, on average, both Indian products and Chinese products are sold at a price lower than that of the rest of the world. But the key point here is that Chinese products are sold at a price even lower than that of India.

05:53 - which means that, China's Price margin is not the reason for its high, intensive margin growth. It's the quantity margin that's playing the, the important role. And, the India China gap, if you look at the quantity margin there, you'll see that China does about nine times better than India. So that's where you, you find the stock contrast between these two countries.

06:19 - What what happens in India is that India is unable to achieve higher intensive margin growth despite having a higher price margin because of very low levels of quantity margin. And also the quantity margin is not growing at all during our period of analysis. What we find in the paper is that China's, export orientation with high income countries is, the key reason for, the higher intensive margin growth and the quantity margin, growth.

06:50 - India, on the other hand, has failed to, exploit its export potential in richer country markets because of the, distorted pattern of specialization. You know, this idiosyncratic pattern of specialization that India has been engaging in. so if you look at India's pattern of specialization, you see this move away from, labor intensive manufacturing and a bias towards skill intensive, capital intensive commodities.

07:18 - whereas China, because of, its integration with the global production networks and, and because China is this assembly hub for manufacturing, by specializing in labor intensive commodities, which is where its true, comparative advantage lies, China thus is able to penetrate deep into the richer country markets, which is where there is, a demand for these kind of products. India, on the other hand,

07:46 - because of lack of specialization in labor intensive commodities, has failed to, penetrate into the richer country market. So here we, use this, categorization where we decompose, manufactured products into different categories based on the factor intensities, and that's how we come up with this finding. What we understand from, our, research is that for India to boost its exports,

08:17 - India must focus on the intensive margin. only then will it be able to, penetrate into the richer country markets, which means that there needs to be a reorientation in its trade specialization pattern. India must focus on labor intensive manufacturing, which is where its comparative advantage lies. so the, the point that we are trying to make in the paper is that all of the extensive margin is important,

08:47 - going by the estimates. We find that for both India and China, it's the intensive margin that has contributed more to, overall, export growth for, for China. So there needs to be, we, we need to rethink about the policy focus on export diversification. what, what we need to do is, rather than spreading your exports thinly across several markets and products,

09:15 - that doesn't really serve the purpose if there is no substantial increase in volume. So that's why we, we say that, you know, intensive margin growth is more important than export diversification. so what policy needs to do is, remove constraints and create an environment which, will enable India to integrate more into the global production networks, by which it can then u utilize economies of scale,

09:49 - specialize in labor intensive commodities, and, you know, thereby create jobs. And there are a lot of other spillover effects by, by doing this. So contrary to general perception, there is a tremendous potential if India were to intensify its trade relationships with richer country markets.

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