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

Amit Basole, Deepankar Basu and Rajesh Bhattacharya

No 2014_08, Working Papers from University of Massachusetts Boston, Economics Department

Abstract: 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.

Keywords: sub-contracting; informal sector; Heckman sample selection; Blinder-Oaxaca decomposition (search for similar items in EconPapers)
JEL-codes: C31 O17 O53 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-06
New Economics Papers: this item is included in nep-bec, nep-cse and nep-iue
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://repec.umb.edu/RePEc/files/2014_08.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mab:wpaper:2014_08

Access Statistics for this paper

More papers in Working Papers from University of Massachusetts Boston, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Harry Konstantinidis ().