Productivity Dispersion and Firm Size: An Inquiry with Indian Manufacturing Firms

This study focusses on the prevalence of productivity differential among firms with different scales of production across manufacturing industries in India. We hypothesize that manufacturing firms are heterogeneous in technology and their structure even within a narrowly defined sector; but, they are expected to be homogeneous within a particular firm size (If a firm enters into a market with new technology and competes with other firms using conventional technology, the incumbents will fail to survive and exit from the market through the process of creative destruction as used the concept by Schumpeter (Capitalism, socialism, and democracy. Harper Torchbooks, New York, 1942). In this process, only successful firms can survive, and resources are transferred from less productive firms to more productive firms. This turnover of the firms also expected to facilitate certain amount of uniformity of the performance among existing firms within a narrowly defined sector.). To analyse the existence of productivity dispersion across different firm sizes for the manufacturing sector, this study uses factory-level data from the Annual Survey of Industries (ASI), the primary data source for registered manufacturing in India, for the period 2009–2012. We have grouped the factory units of similar industries by their firm size into four categories (micro, small, medium and large) at the two-digit level of NIC (2008) by following the definitions as provided in MSME Act 2006. The study found that the productivity dispersion is a deep-rooted problem as total factor productivity of the firms is widespread not only within an industry but even within a firm size of a specific industry.