This study investigates the nexus between oil price uncertainty and firm-level total factor productivity (TFP) in the second-largest oil-importing economy of India.
Proceeding with the firm-level data from 12,811 manufacturing firms with 127,315 firm-year observations, first, this study employs the ACF technique to estimate TFP at the firm level, then panel data regression methodology, and robustness checks are employed to arrive at final conclusions.
This study reveals a negative and significant impact of Oil price uncertainty (OPU) on TFP, suggesting that firms tend to delay investments related to productivity due to heightened risk and operational cost volatility. From firm heterogeneity analysis, financially constrained and listed firms are found to be at greater risk from OPU. The baseline results remain stable across various robustness examinations and free from endogeneity concerns.
The findings provide strong firm-level support to real options theory which posits that heightened uncertainty induces firms to delay or scale back irreversible investments. By empirically showing that external uncertainty systematically lowers TFP, the study theoretically links uncertainty-induced investment postponement to declines in efficiency, innovation and resource allocation, rather than merely reduced capital formation.
This study is the first to investigate the impact of external uncertainty on TFP in India, an issue that remained unexplored despite India's heavy dependence on crude oil imports and its vulnerable position in the geopolitics in the current decade. Second, unlike most of the existing studies that mostly focused on input accumulation or productivity at macro level, this study utilizes and treats TFP as the residual portion of growth of output rather than changes in factor inputs only, thereby capturing, efficiency, innovation and resource allocation effects rather than changes in factor inputs. Third, this study is among the rare studies that employs comprehensive-large dataset to provide concrete and reliable results with generalizability for the entire emerging world subject to country specifications. Furthermore, the contribution of this study is extended to the performance literature by demonstrating how external uncertainty like OPU constraints firm-level efficiency, innovation and resource allocation, thereby shaping productivity outcomes beyond traditional input-based explanations. Moreover, the findings provide strong firm-level support to real options theory which posits that heightened uncertainty induces firms to delay or scale back irreversible investments. By empirically showing that external uncertainty systematically lowers TFP, the study theoretically links uncertainty-induced investment postponement to declines in efficiency, innovation and resource allocation, rather than merely reduced capital formation.
