Effects of Deinstitutionalization: Evidence from the Indian Textile Industry

In this paper, we study the effects of deinstitutionalization and examine how institutions at multiple levels interact with one another in influencing firm-level outcomes. Our empirical context is the global textile industry. The global trade in textiles was governed by Multi-Fibre Agreement (MFA) since 1974, which provided for bilaterally negotiated agreements on import quotas by developed countries. MFA ceased to exist with effect from January 1 2005 after the trading nations became members of World Trade Organization (WTO). We theorize on how the termination of a global institution such as MFA interacts with local institutions such as affiliation to business groups and policy initiatives at the national level. We test our predictions using a comprehensive sample of both publicly listed and private firms in the Indian textile sector. Results from a panel of exporter firms during the 2001-2010 period show that firms affiliated to business groups lose global market share post-MFA, but improve their profitability when compared to stand-alone firms. We also examine the effect of a major policy initiative called the Technology Upgradation Fund Scheme (TUFS) introduced by the Indian government to help Indian textile exporters cope with the abolition of the quota regime. We find that accessing the TUFS enhanced firms’ global market share post-MFA, but this accrued at the cost of lower profitability.