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

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  • Rajesh S. N. Raj
  • Kunal Sen

Abstract

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.

Suggested Citation

  • Rajesh S. N. Raj & Kunal Sen, 2015. "Finance Constraints and Firm Transition in the Informal Sector: Evidence from Indian Manufacturing," Oxford Development Studies, Taylor & Francis Journals, vol. 43(1), pages 123-143, March.
  • Handle: RePEc:taf:oxdevs:v:43:y:2015:i:1:p:123-143
    DOI: 10.1080/13600818.2014.972352
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    References listed on IDEAS

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    1. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 572-607.
    2. Breman, Jan, 2010. "Outcast Labour in Asia: Circulation and Informalization of the Workforce at the Bottom of the Economy," OUP Catalogue, Oxford University Press, number 9780198066323.
    3. Kuntchev, Veselin & Ramalho, Rita & Rodriguez-Meza, Jorge & Yang, Judy S., 2013. "What have we learned from the enterprise surveys regarding access to credit by SMEs ?," Policy Research Working Paper Series 6670, The World Bank.
    4. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, September.
    5. Beck, T.H.L., 2007. "Financing constraints of SMEs in developing countries : Evidence, determinants and solutions," Other publications TiSEM 85aac075-08b5-44ce-bf1a-9, Tilburg University, School of Economics and Management.
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    Cited by:

    1. Myint Moe Chit, 2018. "Political openness and the growth of small and medium enterprises: empirical evidence from transition economies," Empirical Economics, Springer, vol. 55(2), pages 781-804, September.
    2. Rayees Ahmad Sheikh & Sarthak Gaurav, 2020. "Informal Work in India: A Tale of Two Definitions," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 32(4), pages 1105-1127, September.

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