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Subcontracting and the Size and Composition of the Informal Sector: Evidence from Indian Manufacturing

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Listed:
  • Moreno-Monroy, Ana Isabel

    () (Rovira i Virgili University)

  • Pieters, Janneke

    () (Wageningen University)

  • Erumban, Abdul Azeez

    () (University of Groningen)

Abstract

This paper analyzes the relationship between formal sector subcontracting and the evolution of the informal sector using nationally representative survey data of Indian manufacturing enterprises for the period 1995-2006. In these years of fast economic growth, subcontracting by formal enterprises gained importance, while the informal sector continued to account for 90 per cent of total manufacturing employment. In order to contrast between a 'modernization' and a 'stagnation' view on formal-informal production linkages, we test whether subcontracting is related to the size of more modern versus more traditional segments of the informal sector. The results show that formal sector subcontracting is positively related to the size of the informal sector only for the most modern informal activities, supporting the view that subcontracting is related to informal sector modernization. We find no support for the claim that the continued expansion of very traditional informal activities is related to increased outsourcing by formal manufacturing enterprises.

Suggested Citation

  • Moreno-Monroy, Ana Isabel & Pieters, Janneke & Erumban, Abdul Azeez, 2012. "Subcontracting and the Size and Composition of the Informal Sector: Evidence from Indian Manufacturing," IZA Discussion Papers 6785, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp6785
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    References listed on IDEAS

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    1. Philippe Aghion & Robin Burgess & Stephen J. Redding & Fabrizio Zilibotti, 2008. "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," American Economic Review, American Economic Association, vol. 98(4), pages 1397-1412, September.
    2. Dibyendu Maiti, 2008. "The organisational morphology of rural industries and its dynamics in liberalised India: a study of West Bengal," Cambridge Journal of Economics, Oxford University Press, vol. 32(4), pages 577-591, July.
    3. Ejaz Ghani & William R. Kerr & Stephen O'Connell, 2014. "Spatial Determinants of Entrepreneurship in India," Regional Studies, Taylor & Francis Journals, vol. 48(6), pages 1071-1089, June.
    4. Günther, Isabel & Launov, Andrey, 2012. "Informal employment in developing countries," Journal of Development Economics, Elsevier, vol. 97(1), pages 88-98.
    5. Rob Davies & James Thurlow, 2010. "Formal–Informal Economy Linkages And Unemployment In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 78(4), pages 437-459, December.
    6. Maloney, William F., 2004. "Informality Revisited," World Development, Elsevier, vol. 32(7), pages 1159-1178, July.
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    Cited by:

    1. Ghosh Dastidar, Sayantan, 2015. "Manufacturing and Trade Liberalisation of India: Continuing the Debate," MPRA Paper 61907, University Library of Munich, Germany.
    2. Gustavo A. García, 2017. "Labor Informality: Choice or Sign of Segmentation? A Quantile Regression Approach at the Regional Level for Colombia," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 985-1017, November.
    3. Subash Sasidharan & S. N. Rajesh Raj, 2014. "The Growth Barriers of Informal Sector Enterprises: Evidence from India," The Developing Economies, Institute of Developing Economies, vol. 52(4), pages 351-375, December.
    4. K. L. Krishna & Bishwanath Goldar & Suresh Chand Aggarwal & Deb Kusum Das & Abdul A. Erumban & Pilu Chandra Das, 2018. "Productivity Growth and Levels - A comparison of Formal and Informal Manufacturing in India," Working papers 291, Centre for Development Economics, Delhi School of Economics.
    5. Djidonou, Gbenoukpo Robert & Foster-McGregor, Neil, 2020. "Stagnant manufacturing growth in India: The role of the informal economy," MERIT Working Papers 2020-041, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    6. de Vries, Gaaitzen J. & Erumban, Abdul A. & Timmer, Marcel P. & Voskoboynikov, Ilya & Wu, Harry X., 2012. "Deconstructing the BRICs: Structural transformation and aggregate productivity growth," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 211-227.
    7. Amit Basole & Deepankar Basu & Rajesh Bhattacharya, 2014. "Determinants and Impact of Subcontracting: Evidence from India’s Informal Manufacturing Sector," UMASS Amherst Economics Working Papers 2014-04, University of Massachusetts Amherst, Department of Economics.
    8. Ghani, Ejaz & O'Connell, Stephen D. & Sharma, Gunjan, 2013. "Friend or foe or family ? a tale of formal and informal plants in India," Policy Research Working Paper Series 6588, The World Bank.
    9. Amit Basole & Deepankar Basu & Rajesh Bhattacharya, 2014. "Determinants and Impact of Subcontracting: Evidence from India’s Informal Manufacturing Sector," Working Papers 2014_08, University of Massachusetts Boston, Economics Department.
    10. Nkechi S. Owoo, 2016. "Determinants of choice of economic sector in the non-farm economy in Ghana," African Journal of Economic and Sustainable Development, Inderscience Enterprises Ltd, vol. 5(1), pages 31-54.

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    More about this item

    Keywords

    informal sector; formal sector; subcontracting; India; manufacturing;
    All these keywords.

    JEL classification:

    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General

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