The evolution and impact of North-North and North-South trade have been among the main areas of research in the literature of international trade. But how trade shocks emanating from a low-wage southern country affect the manufacturing sector of other low-wage countries has been little researched. In particular, there is a lack of evidence on firm-level adjustment to low-wage trade shock in a low-wage developing country context. The main objective of the thesis is to fill this gap in the literature by empirically examining the impact of import competition shock from China on the evolution of manufacturing sector in India. This thesis combines plant level data from the Annual Survey of Industries (ASI) 1998-2009 with the product level trade data from UN Comtrade database. The thesis contains two main chapters –chapter 2, which explores the impact of a sharp rise in Chinese import exposure on overall plant performance and product reallocation dynamics within-plant, and chapter 3. The latter dwells on wage inequality and employment within-plant.

Chapter 2 finds that increased import competition from China following its WTO accession leads to improvements in revenue productivity and a reduction of product scope at the plant-level. A 10 percentage point increase in Chinese import exposure leads to a 3.7 percent increase in large plants’ total-factor productivity. The same amount of increase in exposure to Chinese imports leads to a one percent decrease in the number of products produced by the plant. Plant product-level analysis suggests that the impact on selection of products is not symmetric. Plants drop the product in which Chinese import exposure is higher; however, the closer the product is to the core competence of the plant, the less likely it is to be dropped. Although import competition from high-wage countries has no statistically significant impact on plant performance or product scope, plant product-level adjustment shows that import competition shocks from both high-wage countries and China have a similar impact on the selection of products within a plant.

Chapter 3 finds that the rise in import competition from China leads to a general increase in within-plant wage inequality between skilled and unskilled workers in large plants. But the overall pattern is driven by much greater adjustment in flexible labor markets or states that have employer friendly industrial relation regulation, while no significant adjustment is evident in the inflexible market. I find that a 10 percentage point increase in Chinese import exposure leads to a 1.35 percent increase in skill premium in the sample of large plants, whereas the same change leads to a 2.65 percent increase in skill premium in the flexible market. It is also observed that increase in import competition from China causes a downsizing of low-productivity plants through employment destruction, and an expansion of high-productivity plants via employment creation. Again, the reallocation of employment is only evident in the flexible labor market.