Informal Manufacturing Sector Research Articles

Productivity and wage gaps between informal and formal firms in India: Trends and determinants

ABSTRACT This study examines the productivity and wage gaps between informal and formal sector firms in India. Using a comprehensive dataset covering a 15-year period, we explore the influence of access to finance, infrastructure, and labor regulations on these gaps. Employing standard Oaxaca decomposition method, we analyze the role of these factors in explaining the informal–formal gaps in wages and productivity. Our results reveal significant and expanding gaps in both productivity and wages between informal and formal firms. Decomposition analysis suggests firm characteristics and infrastructure as primary factors widening the gaps, while access to finance and flexible labor regulations help narrow them. The findings point to the importance of targeted interventions needed to augment the growth and development of the informal manufacturing sector. Policies that enhance access to finance, improve infrastructure, and promote favorable labor markets can contribute to narrowing the gaps.

Subcontracting Linkages in India's Informal Economy

ABSTRACTSubcontracting relations have often been considered a key channel to facilitate growth in traditional informal enterprises and enable them to transition into larger, modern enterprises. Such relations are expected to strengthen with economic growth. Using nationally representative survey data for the Indian informal manufacturing sector, this article examines the nature and patterns of subcontracting linkages for informal family‐based household enterprises over the high‐growth period of 2001–2016. The article estimates the net accumulation fund (NAF) for these enterprises, which measures their ability to accumulate, and studies the transition possibilities of subcontracted enterprises over time. Results show that the NAFs of subcontracted enterprises remained much lower than those of non‐subcontracted ones, with the disparity growing over the growth period. A vast majority of subcontracted household enterprises are embedded in relations that are akin to a traditional putting‐out system, with little control over their production processes. Female‐owned enterprises and those located within the household are more likely to be in such put‐out relations. Average NAF for put‐out household enterprises has been lower than for relatively autonomous subcontracted and non‐subcontracted firms, although over time the gap in NAF between put‐out and non‐put‐out firms, and thus their differential ability to transition, has narrowed. The prevailing nature of subcontracting relations in India's informal economy, even during the peak growth period, appears to be starkly different from the dynamic linkages that are celebrated in the literature as a channel for facilitating growth and transition.

Allocative Efficiency between and within the Formal and Informal Manufacturing Sectors in Zimbabwe

Abstract Resource misallocation has the potential to reduce aggregate total factor productivity and undermine industrial development. Aggregate productivity losses are found to be particularly pronounced in emerging economies where large market frictions impede efficient resource allocation. Available estimates, however, almost entirely exclude firms in the informal sector that in some countries, such as Zimbabwe, make up a high share of overall production and employment. The exclusion of informal firms can result in either an over- or under-estimate of the aggregate productivity losses from misallocation. This paper, therefore, uses firm-level survey data to analyze how market distortions contribute to the misallocation of resources within and between the formal and informal manufacturing sectors in Zimbabwe. Applying the approach developed by Hsieh and Klenow (2009) to firm-level microdata, the results reveal extensive resource misallocation in both the formal and informal manufacturing sector. Market shares of informal firms are found to be low relative to their productivity—an outcome associated with relatively large capital market distortions. Misallocation is also more pronounced among relatively productive firms, thus exacerbating aggregate losses in total factor productivity (TFP). Estimates indicate that aggregated gains in TFP of 151.4 percent can be realized through efficient resource allocation.

Effects of Subcontracting on Firms in India's Informal Manufacturing Sector: An Empirical Investigation

ABSTRACT: Subcontracting occurs when a producer outsources a part of its production. We study the effect of subcontracting from a firm with buyer power on the profits of subcontracted upstream firms, and how profits vary on the basis of location of firm and owner's gender. Subcontracting is the treatment in our study and the dependent variable is the ratio of Gross Value Added to Sales adjusted or unadjusted for wages. The decision of a firm to subcontract or not is endogenous, so we cannot use OLS regression. Since we cannot have information on a firm being treated and non-treated at the same time, we use the Average Treatment Effect on Treated (ATET) model with Nearest Neighborhood Matching (NNM) approach, in which each treated firm is matched to an untreated firm which is its nearest neighbor on other parameters, to see the effect of treatment on outcome variable on the treated group had they been not treated. We find the existence of a subcontracting premium where being in a subcontracting relationship is beneficial for the informal sector firm, though the magnitude of this premium is small, and female-headed firms gain less from subcontracting. Subcontracted male-owned firms earn a higher premium but also pay more wages out of their total revenue to labor as compared to female-owned firms, perhaps because the latter are more likely to be Own Account Manufacturing Enterprises (OAME) which do not employ hired workers. Our results show that buyer power of the subcontracting firms is offset by the benefits they provide to the subcontracted firms, possibly in the form of assured demand and payments. Thus, policies favoring the informal sector firms need to incorporate the benefits of subcontracting by exploring alternative modes of distribution with lower distribution margins, such as cooperative societies or online platforms for example Amul, MEESHO. Policies should also focus on reducing the profit margin differential between male and female owned firms by formulating a proper channel using mass media to communicate credit information and updates.

Design Thinking and Innovation in the Informal Industries in Kenya

In the recent past there have been calls to have Kenyan products labeled ‘Made in Kenya’. By doing so, the proponents believe that products ‘Made in Kenya’ will flock the local stores and even find their way to the foreign markets, thereby making Kenya proud of itself as well as earning the much-needed foreign exchange. While ‘Made in Kenya’ labeled products would be a great step forward to Kenya’s economic wellbeing, showcase talents and skills of the youth and a boost to its image in the global market, the low technology predominantly used in Kenya and lack of design thinking, still remain the greatest impediment to innovation. Using low technology in manufacturing usually results in high production costs and lack of capacity to launch mass production in response to acute increase in market demands. For example, the informal manufacturing sector in Kenya commonly referred to as Jua Kali, is a collection of semi-organized, unregulated, smaller ventures that employ a large number of people and rely on low-level technologies. A significant amount of industrial output is devoted to meeting basic requirements, such as the provision of low-cost consumer goods and services. Wood and furniture, metal products, glass and pottery, clothes, and leather are all produced in this industry. The lack of design thinking and low-level technology used in the production process obviously results in more man-hour on each unit produced, yet this is rarely considered on the final price of the product. The prices to a large scale, are usually concerned with the cost of materials without considering other hidden costs. The drive is to make the products affordable to low-income consumers, in order to satisfy the traders’ basic needs. In a wider perspective, this study focused on the application of design thinking and its impact on innovations in the informal industries in Kenya. Specifically, the study sought to establish; the application of design thinking as a system of feasibility to increase innovation in the informal industries in Kenya, the application of design thinking as a system of desirability to increase innovation in the informal industries in Kenya and its impact on the innovation in the informal industries in Kenya, as well as the application of design thinking as a system of viability to increase innovation in the informal industries in Kenya. This study reviewed secondary sources and investigations others have previously conducted in relation to the title of the study. Conventional content analysis was used to analyze data. The process of analysis began with the development of the research questions, then the identification of the dataset, and thorough evaluation of the dataset. Our findings deepen the current understanding about policy innovation and technological intervention in the informal industries in Kenya. The findings could also benefit the Government of Kenya, Kenya Association of Manufacturers and Juakali Associations, in terms of policy formulation and enhancement of sector performance.

Migration and COVID-19 Pandemic: A Study of Uttarakhand Migrants in Delhi

The COVID-19 crisis has posed unprecedented livelihood challenges for migrants across the globe. In India too, the vulnerability of migrants working away from their homes, at a different location, has come to light—in the face of the pandemic, many were forced to return to their places of origin, and migrants from Uttarakhand residing in Delhi were no exception. This article is an attempt to understand the disruptions in the lives and livelihoods of migrants from Uttarakhand, who were residing in low-income settlements in Delhi during the COVID-19 pandemic. The findings show that more than three-fourths of these migrant workers lost their jobs during the recent pandemic. Dipping into their past savings and dis-saving, the majority of these migrants survived on lesser food, and essentials in order to stay alive on their reduced household incomes. Understandably, the probit results indicate that migrant workers, particularly the less educated, recent migrants and those engaged in the informal manufacturing and service sectors are likely to be more vulnerable during a crisis like COVID-19 than others, and thus, need urgent policy attention.

Subcontracting and enterprise development in India's informal manufacturing sector

PurposeSubcontracting is a crucial cause behind the simultaneous existence of formal and informal entrepreneurship in India. This article aims to provide an over-time comparative analysis between the subcontracted and the non-subcontracted enterprises within the informal sector. Further, it also brings to fore the contribution of subcontracting towards ensuring sustainability of the informal enterprises.Design/methodology/approachBy constructing a panel data from two rounds of NSS Unincorporated Enterprise Survey Data (2010 and 2015), and employing a PSM-DID method, considering labour productivity and net retained earnings as two critical indicators of growth and development of the informal sector firms, this study has made some broad claims regarding the differences in immediate and long run performances between the subcontracted and non-subcontracted informal sector enterprises in India.FindingsThis study finds that subcontracted enterprises have not only been performing at a much lower level than the non-subcontracted enterprises, they are also growing much slowly than their counterparts. However, it has been observed that for the establishments, who are capital abundant and also have a larger production capacity, subcontracting is showing the prospect for deriving sustainable gains.Originality/valueThis article contributes to the existing literature in the following two ways. Firstly, it provides an over-time comparative analysis between the subcontracted and the non-subcontracted enterprises within the informal sector. Secondly, it brings to fore the contribution of subcontracting towards ensuring sustainability of the informal enterprises.

Home-based work or non-home-based work? Factors influencing work choices of women in the informal sector

PurposeThe purpose of the study is to determine the factors influencing the job choices of Indian women working in the informal manufacturing sector. The informal sector has always played a significant role in emerging and developing countries. This study investigates the effect of social cultural norms influencing women informal workers in the manufacturing sector to participate in home-based work (HBW) or non-home-based work (non-HBW) .Design/methodology/approachBoth Quantitative and Qualitative methodology have been used. In accordance with descriptive statistics, a multinomial logistic regression model was employed to assess women's likelihood of participation in home-based activities. To gain a more in-depth insight, semi-structured interviews were used to collect the perspectives of both men and women workers. The data were analysed using narrative analysis.FindingsThe findings reveal that a high fixed cost is a key driver of HBW. Workers prefer to work from home when the loss of joint household production due to working outside is substantial. Social and cultural standards play a significant effect in job selection for women. These conventions limit women's employment options, and the current study demonstrates that strong social and cultural standards limit women to home-based jobs only.Social implicationsEnhancing women's involvement in the public realm is critical and may be accomplished by affirmative action; but, for women to be treated equally in their homes and in society, an attitude shift is necessary. Despite the government's initiatives and regulations aimed at protecting informal women workers, many of the programmes and legislation fall short. The position of women in this environment cannot be improved until and unless the norms of society are flexible and liberal for Indian women. The first step would be to educate people and make them aware of the need to abandon outdated practices and embrace new progressive ideals. It will not be achievable just via government efforts; rather, both the government and society must work together to achieve the same goal.Originality/valueThe author hereby declares that this submission is their own work and to the best of their knowledge it contains no materials previously published or written by another person, except where due acknowledgement is made in the thesis. The author would like to undertake the above-mentioned manuscript has not been published elsewhere or under editorial review for publication elsewhere; and that all co-authors have agreed to have seen and approved the manuscript for submission.

Co-location of Formal and Informal Manufacturing and Firm’s Performance: Evidence from India

This study analyses the impact of co-location between formal and informal manufacturing sectors on plant-level productivity. We employ a unique data obtained by merging plant-level data from Annual Survey of Industries (ASI 2011–2012) and Survey of Unorganised Manufacturing and Repairing Enterprises provided by National Sample Survey Office (NSSO 67th round). We find that formal and informal manufacturing plants gain from localisation. Further, co-location with informal enterprises has a positive impact on productivity of formal sector plants; however, we observe insignificant impact of co-location on informal sector enterprises. Additionally, we find evidence that informal sector enterprises benefit from industrially diversified regions. JEL Codes: D24, R12, R3

Gold governance and goldsmithery: Economic sociology of an informal manufacturing sector in India

In India, gold’s uniqueness lies in its dual demand for ‘sacred’ ritual purposes as well as ‘profane’ economic security. As a scarce commodity, gold is continuously monitored and regulated by the state. This study investigates how communities associated with the craft and trade of gold jewellery cope with state regulations, an aspect that has largely gone undocumented in sociological literature. The article traces the transformation of the goldsmithing sector in post-independence India. The repeal of the Gold Control Act 1968 in 1990 and high demand during the post-liberalisation period gave a tremendous fillip to the gold jewellery sector. The study captures the occupational recasting as a new community of goldsmiths emerged during this period replacing the traditional goldsmithing castes. It contributes to the under-studied field of goldsmithing in India providing an ethnographic account of a triadic relationship between an informal manufacturing sector, state regulation and a self-organised workforce based on regional ties and village networks.

Dualism and Structural Transformation: The Informal Manufacturing Sector in India

We identify a basic dualism within the informal manufacturing sector (IMS) in India between a ‘traditional’/non-capitalist segment, comprising family-based household enterprises that constitute the vast majority of the IMS, and a segment of ‘modern’/capitalist enterprises employing wage labour. We focus on the high-growth decade of 2000–2001 to 2010–2011 to analyse whether there has been a marked tendency of this ‘traditional’ segment to transform into a ‘modern’ segment. We construct a variable, the net accumulation fund, which indicates the ability of an enterprise to accumulate and grow, and explore its evolution, over time and across industries, for enterprises with different production structures and firm-level characteristics. We show that while, on one hand, the average ‘traditional’ enterprise has been able to economically reproduce itself rather than withering away, the dualism between the ‘traditional’/non-capitalist and the ‘modern’/capitalist segments has been reproduced and further reinforced during this period of high economic growth, raising questions about the process of economic transformation as envisaged in much of development literature.

Spatial Industrial Diversification in India: An Analysis of Unorganised Manufacturing Enterprises

Industrial diversification continues to be an important policy goal in regional planning, because of its direct positive effect on economic growth and stability. A large number of studies in India, carried out at different geographical scales namely, national level, states, and districts show that the industrial structure of India and its regions and states is characterised by high degree of specialisation rather than diversification. However, these studies are related to the organised (or registered) manufacturing sector only. Despite the fact that the unorganised manufacturing sector, also known as the informal manufacturing sector, is vast and diverse, and occupies an important role in India’s industrial sector, very few studies have attempted any systematic analysis of the structure of the unorganised enterprises, both at the national and regional levels. Therefore this paper aims to examine the industrial structure and the extent of diversification of unorganised manufacturing enterprises across the Indian states. Using data from the 51st (1994–95), 62nd (2005–06), and 67th (2010–11) “quinquennial” rounds the National Sample Survey on unorganised manufacturing enterprises, we have analysed the industrial structure of the states at two-digit industry level by employing location quotient technique, whereas the diversification coefficient has been employed to examine the degree of diversification of unorganised manufacturing enterprises in different states. We have also examined the relationship between diversification of unorganised manufacturing enterprises and level of industrial development across the states.

Moving out of the bottom of the economy? Constraints to firm transition in the Indian informal manufacturing sector

The predominant type of firms in developing countries is small family firms and the self-employed in the informal sector. Very few family firms make the transition to larger firms employing non-family labour. In this paper, we examine the reasons for the low presence of firms employing non-family labour in the informal sector, using a firm-level data set drawn from nationally representative repeated cross-sectional surveys of the Indian informal manufacturing sector. We find that the key constraint to firm transition is firm capabilities, followed by the level of urbanisation, access to electricity and roads, and human capital, with financial constraints playing a lesser role. JEL codes: O17, L25, D22

Technical efficiency of informal manufacturing sector enterprises: Evidence from the informal metal industry of Zimbabwe

Using data collected from a sample of 442 informal enterprises operating at eight centres in three provinces of Zimbabwe, this study evaluates technical efficiency of selected informal sector metal manufacturing enterprises. An analysis of factors that influence such efficiency levels has been conducted by way of estimating a stochastic frontier (Cobb-Douglas) production function. The analysis finds that operations in the informal metal manufacturing industry are still highly labour intensive with 75% of gross value added coming from labour contribution. The mean technical efficiency of the informal firms has been found to be 0.72, implying that there is still scope for enterprises in the informal metal manufacturing industry to increase their production by 28% if they efficiently allocate available productive inputs using available technology. The main sources and determinants of the inefficiency were also analysed and identified as comprising location of the enterprise, age of entrepreneur, level of education, age of firm and experience of firm owner, which were found to have significant influences on (in)efficiency. The study recommends that public policy should create an environment conducive to aiding entrepreneurs to operate by way of relaxing regulatory requirements for formalising the business ventures of small firms and emerging entrepreneurs.

Finance Constraints and Firm Transition in the Informal Sector: Evidence from Indian Manufacturing

This paper focuses on the role of finance constraints in determining the lack of transition of firms in India from very small family firms, which are the predominant type of firms in the informal sector, into larger informal firms that employ non-family labour. Using a rich firm-level data-set drawn from nationally representative surveys of the Indian informal manufacturing sector, this paper tests for the role played by finance constraints in firm transition in the informal sector at the firm and district level. There is evidence that the difficulty that firms face in accessing external finance acts as a significant constraint to small firm growth in the informal sector. Looking at data from India's districts, it is found that the financial development in a given district increases the likelihood that firms in the district will make the transition from household enterprises into non-household enterprises.

Productive efficiency of the urban informal manufacturing sector in Assam

The paper analyses the productivity growth pattern in the urban informal manufacturing sector of Assam in India. The productivity of the urban informal manufacturing sector of the state is calculated and compared to the national average by using both partial and total factor productivity measures. Total factor productivity growth is taken as the difference between the growth rate in value added and a weighted sum of capital, and labour growth rates, the weights being the share of labour and capital in value added respectively. The index of efficiency of labour is computed for the state and compared to the national levels and is calculated as the difference between the actual growth rate and the desired growth rate of labour productivity. The study finds that positive total factor productivity growth of this sector both at the state as well as at the national level which is an encouraging signal.

International factor mobility, informal interest rate and capital market imperfection: A general equilibrium analysis

This paper makes an attempt to provide a theory of determination of interest rate in the informal credit market in a less developed economy in terms of a three-sector static deterministic general equilibrium model. There are two informal sectors which obtain production loans from a monopolistic moneylender and employ labour from the informal labour market. On the other hand, the formal sector employs labour at an institutionally fixed wage rate and takes loans from the competitive formal credit market. We show that an inflow of foreign capital and/or an emigration of labour raises (lowers) the informal (formal) interest rate but lowers the competitive wage rate in the informal labour market when the informal manufacturing sector is more capital-intensive vis-à-vis the informal agricultural sector. International factor mobility, therefore, raises the degrees of distortions in both the factor markets in this case.

Institution of State–Business Relation and Its Impact on Manufacturing Productivity Growth in India: A Post-reform Analysis

Empirical studies on total factor productivity growth (TFPG) in developing countries highlight trade openness, research and development and market structure as being the most important determinants of TFPG. The role of institutions remains overlooked in the literature on the determinants of TFPG. In this article, we look into the role of institutional quality as captured by effective state–business relationships (SBRs) in influencing TFPG, using Indian manufacturing as a case study. By SBRs we mean a set of highly institutionalized, responsive and public interactions between the state and the business sector. To compute TFPG, we use firm level data for both the formal and informal manufacturing sectors. We correct for the simultaneity bias associated with the production function approach for TFPG estimation by employing a method developed by Levinsohn and Petrin. We propose measures of effective SBRs for 15 Indian states over the period 1994–2005, and then use them in TFPG equations to estimate the effect of SBR on TFPG. The results indicate that SBR has positively affected the TFPG of Indian industry. The effect, however, is primarily for the formal sector.

Interpreting Student Views of Learning Experiences in a Contextualized Science Discourse in Kenya

AbstractDespite the centrality of the informal manufacturing sector (Jua Kali) to the Kenyan society and its richness in scientific phenomena, there is no strong link between activities in the Jua Kali and school science. And, although there has been an ongoing public discourse in Kenya to industrialize, this hope is unlikely without connecting classroom science to the real world of the Jua Kali. In view of this concern, an interpretive case study was framed to investigate Kenyan high school students' views of contextualized science learning in culturally relevant real‐world science curriculum. This article reports the analysis of Kenyan students' views of contextualized science learning and school science curriculum and instruction elicited through an interpretive case study approach employing interview methods. The analysis of interview data reveals that the participating students interviewed expressed views that: (1) acknowledged the richness of Jua Kali in scientific phenomena and embedded science; (2) indicated existence of a lack of meaningfulness and relevance in existing science curriculum and instruction model; (3) revealed experience of resonance of group and real life learning strategies modeled in the curriculum unit with their preferred learning modes; and (4) revealed their metacognitive assessment of the traditionally used and the new contextualized science modeled learning strategies. Thus, this article offers insight about the Kenyan students on their journey through the experience of contextualized science learning. © 2013 Wiley Periodicals, Inc. J Res Sci Teach 50: 381‐407, 2013

Trade Liberalization, Pollution and Welfare:Theoretical Analysis with Reference to Informal Manufacturing Sector

This paper examines the impacts of foreign capital inflow and reduction of import duty on environmental pollution and social welfare with reference to an informal sector. The informal sector produces a non-traded intermediate good for the formal sector and generates pollution. Owing to environmental regulations, the formal sector pays the pollution tax as it shifts the burden of production to the informal manufacturing sector. Under certain restrictive conditions, an inflow of foreign capital increases pollution but at the same time increases social welfare. In addition to a reduction of import duty, it reduces pollution and under some reasonable conditions increases social welfare.