Small firms in Indian manufacturing: Some stylized facts

Abstract

ABSTRACT This article presents some stylized facts about firms in Indian manufacturing. We utilized a unique dataset on manufacturing firms that combines both the informal and formal sectors to create a continuum of firms. Findings of the study point to the presence of significant informality in Indian manufacturing. We observe a bimodal structure in size distribution with a large share of employment in small and large-sized firms, with medium-sized firms occupying relatively a small share in employment. This indicates weak upward graduation and entrepreneurial development of small firms. We also witnessed a large and growing gap in productivity and earnings between small and large firms. Our findings show that firm size is positively and significantly correlated with productivity and wages, implying that the larger the size, the higher the labor productivity and earnings. These findings suggest that small-firm transition will significantly improve the level of productivity and earnings in Indian manufacturing.