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Determinants and Impact of Subcontracting: Evidence from India’s Informal Manufacturing Sector

Listed author(s):
  • Amit Basole
  • Deepankar Basu
  • Rajesh Bhattacharya

There are two divergent perspectives on the impact of subcontracting on firms in the informal sector. According to the benign view, formal sector firms prefer linkages with relatively modern firms in the informal sector, and subcontracting enables capital accumulation and technological improvement in the latter. According to the exploitation view, formal sector firms extract surplus from stagnant, asset-poor informal sector firms that use cheap family labour in home-based production. However, direct, firm-level evidence on the determinants and impact of subcontracting is thus far lacking in the literature. We apply a modified Heckman selection model to Indian National Sample Survey data on informal manufacturing enterprises (2005{06). We find that home-based, relatively asset-poor, and female-owned firms are more likely to be in a subcontracting relationship. Further, we perform selectivity-corrected Oaxaca-Blinder Decomposition and calculate treatment effects to show that subcontracting benefits smaller firms, firms in industrially backward states and rural firms; it is harmful for larger firms, firms in industrially advanced states, and urban firms. Our results suggest that the effects of subcontracting are more complex than those predicted by the divergent perspectives. Policy-makers need to engage with this complexity.

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File URL: http://repec.umb.edu/RePEc/files/2014_08.pdf
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Paper provided by University of Massachusetts Boston, Economics Department in its series Working Papers with number 2014_08.

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Length: 39 pages
Date of creation: Jun 2014
Handle: RePEc:mab:wpaper:2014_08
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