Abstract
This chapter analyses factors shaping the growth of small firms in India by using large-scale census data of small firms. Consistent with findings from prior research on developed countries, the results suggest that size and age have a negative impact on firm growth. Enterprises managed by women have lower expected growth rates and proprietary firms face lower growth on the whole, especially if they are young firms. Exporting has a positive effect on firm growth, especially for young firms and for female-owned firms. Although some small firms are able to convert knowhow into commercial success, we find that many others are unable to translate it into superior growth.
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Notes
- 1.
Most of these items are foodstuffs and consumer products. For a complete list of protected items, see http://www.smallindustryindia.com/publications/reserveditems/resvex.htm.
- 2.
Small Scale Industry comprises of small firms with an initial investment less than 10 million Indian rupees, an amount approximately equivalent to 200 thousand USD (http://www.dcmsme.gov.in/publications/circulars/circularmay1994.html#icoty, accessed on 25 October 2010).
- 3.
For example, Beck, Demirguc-Kunt, and Levine (2005) examine the role of the small and medium enterprise sector in 45 countries (not including India). They begin by reviewing the prior literature and conclude, “firm-level studies do not provide an empirical foundation for subsidizing SMEs.” (Beck et al. 2005, p. 201). In their empirical analysis, they observe a robust positive relationship between the relative size of the SME sector and economic growth, although the SME-growth relationship is not robust to the use of instrumental variables to control for endogeneity. Put differently, they write that “although a prosperous SME sector is a characteristic of flourishing economies, we cannot reject the view that SMEs do not cause growth.” (p. 224). They also fail to observe any significant relationship between the size of the SME sector and poverty alleviation.
- 4.
As such, there is some skepticism about the economic foundations of government support of small enterprises—“India is …exceptional in the extent and range of its policies that directly support SSEs. …They have been romantic, rather than economic.” (Little, 1987, p. 232). SSEs is an acronym for small scale enterprises.
- 5.
- 6.
A negative relationship between age and growth has been found by Fizaine (1968) for French establishments, Dunne, Roberts, and Samuelson (1989) for US establishments, Evans (1987b); Evans (1987a) for US manufacturing firms, Variyam and Kraybill (1992) for US manufacturing and services firms, Liu, Tsou, and Hammitt (1999) for Taiwanese electronics plants, Sleuwaegen and Goedhuys (2002) for Ivorian manufacturing firms, Reichstein and Dahl (2004) for Danish limited liability companies, Geroski and Gugler (2004) for large European companies, and Yasuda (2005) for Japanese manufacturing firms.
- 7.
The survey was conducted on all registered small firms and was conducted by the office of the Development Commissioner, Government of India. According to the Development Commissioner, India, “All the SSI units permanently registered up to 31-3-2001 numbering 2,262,401 were surveyed on complete enumeration basis, of which 1,374,974 units (61%) were found to be working and 887,427 units (39%) were found to be closed.” (http://www.dcmsme.gov.in/ssiindia/census/highlights.htm, accessed on 25 October 2010).
- 8.
The rapid transformation of the Indian economy from a state-controlled license regime to a liberalized regime is widely documented in the literature (we refer the reader to Aghion, Burgess, Redding, & Zilibotti, 2005; Kochhar, Kumar, Rajan, Subramanian, & Tokatlidis, 2006; Rodrik & Subramanian, 2005). These economic transitions have had implications for industry wide productivity and competition (see Krishna & Mitra, 1998; Balakrishnan, Parameswaran, Pushpangadan, & Babu, 2006). India is the second most populated country in the world with a population exceeding one billion. For further indicators of economic development in India, such as GDP, life expectancy, literacy rates, inequality and the structure of Indian industry (shares of agriculture, industry and services) the reader is referred to Allen, Chakrabarti, De, Qian, and Qian (2006).
- 9.
The Ministry of Small Scale Industries defines firms having an initial investment less than 10 million Indian rupees as small and medium sized enterprises.
- 10.
By upper threshold we refer to the upper limit of the investment of 10 million Indian rupees that is used to define small scale firms in India. In order to check for the robustness of the results, we artificially lower this threshold to exclude firms that have initial investment greater than 9 million Indian rupees, and find that the results are consistent.
- 11.
Growth is measured in terms of changes in gross output, rather than in terms of an alternative measure of firm size such as number of employees, because of data constraints. For example, we only have data on firm employment levels for the single financial year 2001–02, which means it is not possible to calculate employment growth rates.
- 12.
The Pareto distribution (also known as a power law distribution) can be represented as a straight line of negative slope on log-log axes.
- 13.
By definition all firms in the survey have an investment in fixed assets in plant and machinery that is less than Rs 10 million. This is the upper threshold for firms’ getting classified under Small Scale Industry in India at the time when the survey was conducted.
- 14.
Incidentally, this lends some support to the assumption of an exponential distribution of firm age in the model of the firm size distribution in Coad (2009). In this model, the lognormal distribution of firm size obtained from a Gibrat process is mixed with an exponential firm age distribution to obtain the Pareto firm size distribution suggested by a number of empirical studies.
- 15.
Self-reported data on the age of small businesses has been described by Phillips and Kirchhoff (1989) as being less than perfectly reliable, even in developed countries such as the US. In the case of India, it should be remembered that many people don’t know exactly how old they are! As such, there may well be a small degree of measurement error in the age distribution, and as a result we don’t seek to explain every feature of this distribution, but at this preliminary stage we merely emphasize the broad shape of the distribution. For instance, the age distribution as represented in Fig. 5.1 is powerful enough to quickly dispel the myth that all small firms are young.
- 16.
In our baseline sample (e.g. in Table 5.2 column (2)) we have around 700’000 observations.
- 17.
Previous work on growth rate distributions has suggested that the empirical distribution is well approximated by a unimodal ‘tent-shape’ distribution, in particular, the Laplace (or symmetric exponential) distribution. For a survey of growth rate distributions, see Coad (2009, Chapter 3).
- 18.
In further analysis (not reported here) we also explored the robustness of our results using a 200% growth cut-off point, and obtained similar results.
- 19.
A similar approach can be found in e.g. Liu et al., 1999.
- 20.
For example, without removing outliers we would have 695757 observations in Column 2 of Table 5.3, but when outliers are removed we have 671159 observations. This corresponds to a loss of 3.535% of observations.
- 21.
This estimate is calculated as follows. From the summary statistics table (Table 5.1) we observe that the standard deviation of log(output) is 1.7610. Now, from column (2) of Table 5.2 we see that the coefficient on log(output) is −0.0159. Ceteris paribus, changing log(output) by one standard deviation changes the dependent variable by 1.761 * −0.0159 = −0.0279999. The dependent variable is loge(growth rate), and the change in loge(growth rate) is = −0.0279999. A log(growth rate) of −0.0279999 corresponds to a (conventionally measured) growth rate of −0.0276115 (given that e^(−0.0279999) −1 = −0.0276115), which can then be rounded to −2.76%.
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Tamvada, J.P. (2021). Firm Growth and Barriers to Growth Among Small Firms in India. In: Microentrepreneurship in a Developing Country. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-68628-4_5
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