Abstract
How does informal economic activity respond to increased financial inclusion? Does it become more entrepreneurial? Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We take advantage of nationwide data collected in 2010/11 and 2015/16 by India's National Sample Survey Office on unorganized (informal) enterprises. This period was one of rapid expansion of banking availability aimed particularly at the unbanked, under-banked, and women. We find strong empirical evidence supporting the crucial role of financial access in promoting entrepreneurship among informal sector firms in India. Our results are robust to alternative specifications and alternative measures of financial constraints using an approach combining propensity score matching and difference-in-differences. However, we do not find conclusive evidence that increased financial inclusion leads to a higher likelihood of women becoming entrepreneurs than men in the informal sector.
Highlights
One of the salient features of under-development is the existence of a large informal economy that is characterized by a large mass of non-entrepreneurial firms (De Vreyer and Roubaud 2013; La Porta and Shleifer 2014)
Our primary objective is to analyse the role of financing in explaining whether firms are entrepreneurial in the Indian informal sector, and whether female-owned firms are more likely to be entrepreneurial with greater access to finance
We began our paper by laying out two questions: (1) Does informal economic activity become more entrepreneurial in response to increased financial inclusion? (2) Does access to new financing options change the gender configuration of informal economic activity and, if so, in what ways and what directions? We picture the informal sector as composed of two firm types: family firms and entrepreneurial firms
Summary
One of the salient features of under-development is the existence of a large informal economy that is characterized by a large mass of non-entrepreneurial firms (De Vreyer and Roubaud 2013; La Porta and Shleifer 2014) These firms are typically household units, which are survivalist in nature, with limited prospects for growth (Grimm et al 2012).. Our strategy lies in taking advantage of nationwide data collected in 2010/11 and 2015/16 by India’s National Sample Survey Office (NSSO) on unorganized (informal) enterprises These are repeated cross-sections of unincorporated non-agricultural enterprises. We provide background, including brief discussions of the literature on the roles of gender and finance in informal sector firm transition, and the relevant policy environment in India. We discuss the background to this study and the relevant policy environment in India in subsequent subsections
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