The impact of policy on firms' performance: The case of CNC Machine Tool industry in India

This study is about understanding how the government policy actually works at firm level in the context of developing countries' industrialization. In the literature, the discussions on impact of government policy on corporate performance primarily stress on macroeconomic aspects of industrial behavior and broad measures of industrial performance. They offer inadequate understanding of the mechanisms through which firms' performance is affected. This study attempts to fill in this void. It specifically endeavours to answer the research question: how Industrial policy affects performance of the firms? For empirical evidence, we considered the case of CNC Machine Tool industry in, India. The study is primarily exploratory and qualitative based on case studies.; The study endeavors to explain the policy-performance causation placing resources of the firms at the center of analysis. The three elements of the causality chain: policy, resource and performance are the building blocks of our analysis. The policy is seen in terms of technology, investment, education and training, market development and industrial governance. The resource is segmented as research, development and engineering; manufacturing; human; marketing and linkage. All these are further elaborated in terms of three more constructs: capability, mechanism and indicator. We analysed how the firms adopted various mechanisms to leverage the policies in force to build different capabilities that finally culminate in firms' performance. In certain cases the mechanisms were adopted to compensate the absence of policy or lessen its adverse impact. The promotional nature of Technology- and Investment policy as well as increased transparency in industrial governance since 1991, led the firms to emphasize more on mechanisms of assimilation of technology, new product development and subcontracting to build product development- and manufacturing capability that culminated in increased sales and exports. In the absence of suitable Education and Training policy the firms recruited educated persons, imparted in-plant training and periodic training to build human resource capability that increased firms' labour productivity. The observed divergence in firms' performance is attributed to variations in scope and implementation of mechanisms by the firms. A few pro-active firms identified what policy provides and how best that could be used or what policy does not provide and acted accordingly. The small firms appear to give less emphasis on adoption of mechanisms primarily due to resource constraints.; The analyses further led to the identification of certain activities or 'processes' that are found to be crucial for building various capabilities in the firms. A process encompasses one or more mechanisms either in its essence or in totality. It may also be an underlying factor that triggers mechanisms to work individually or together. The processes are visualised as acquisition, integration, development and generation. Their identification has added another bead in the strand of policy-performance causation. Like the mechanisms, the adoption of processes by the firms is also influenced by various policies in vogue that finally culminates in firms' performance. Thus the government needs to give proper emphasis on strengthening of these processes for sustained development of an industry. From the policy perspective, this research is an attempt to provide a systematic analysis that improves policy-making.