The IUP Journal of Applied Economics
Does Productivity Increase with Firm Size in the Unregistered Manufacturing Sector? Evidence from an Indian State

Article Details
Pub. Date : April, 2020
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE10420
Author Name : Alok Ranjan Dutta
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 28

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Abstract

Compared to the formal or registered sector, productivity of the firms in the unregistered sector is low, and it is widely held that low productivity is due to its small size. Based on the firm-level data generated from the field survey, the paper looks into the relationship between firm size and productivity in the unregistered manufacturing sector of Assam, a state in Northeastern India. Firm size in the study is represented by employment or number of persons engaged in the firms. The study finds that size is not an important attribute of firm productivity in the unregistered sector. Rather, the findings reveal a negative relationship between firm size and productivity. Relatively larger-sized firms are experiencing a decline in both labor and multifactor productivity in the sample. Hence, the paper submits that performance of the unregistered firms may not always be improved by expanding only their size.


Description

A fair number of studies are there in the literature that focus on the importance of size for a firm. Bigger firm size generates scale economies which facilitate large farms not just in the production process, but also in exploring and developing new markets and dealing with the business climate. The importance of firm size has been extensively discussed in the literature for the registered or the formal sector. The studies mostly found that there is generally a positive relationship between size and productivity in the formal sector. Larger firms in the formal sector are more likely to engage themselves in research and development and export activities and are less affected by a poorly developed financial sector than the small firms (Cohen and Klepper, 1996; and Bigsten et al., 1997). But the relationship between firm size and productivity in the informal or unregistered sector is inconclusive. The issue is important since there is a substantial productivity gap between formal and informal firms in the developing countries (La Porta and Shleifer, 2014) and the small size of informal firms is often viewed as a reason for their low productivity. So, one might be tempted to argue that this productivity gap can be reduced by increasing the productivity of the unregistered firms via increasing their size. In the literature, not many studies are found that deal with the relevance of firm size in the unregistered sector, and the studies that do exist show a mixed result (Benjamin and Ahmadou, 2012; and Amin and Asif, 2015). In Indian context, a few studies (Raj and Sen, 2016) are there on the issue of firm size and labor productivity relationship in the informal manufacturing sector. Yet, we observe a clear dearth of detailed studies on this issue particularly at the regional or state level. To fill up this gap in the literature, the present paper takes up the issue and attempts to answer the research question: Is the size of an unregistered firm in the manufacturing sector relevant for its productivity?

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