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Drivers of firm growth: micro-evidence from Indian manufacturing

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Abstract

This paper investigates the determinants of firm growth for Indian manufacturing enterprises. The study uses the data obtained from the Prowess database, provided by the Centre for Monitoring Indian Economy (CMIE), covering the period 1991–2010. The study explores the growth of Indian manufacturing firms with respect to 1) its cross-sectional distribution, 2) its dynamics over time, and 3) its determinants. The cross-sectional distributional analysis exhibits high levels of heterogeneity in firm growth patterns, even across firms operating within the same sector, which increases over time. The inter-temporal dynamics observed with the help of transition probabilities matrices suggests that firm growth rates are not highly persistent in time, which is in contrast with the evidence from developed countries. It also reveals the coexistence of firms with very different characteristics and performance within sectors. Given the wide heterogeneity and non-persistent behavior of firm growth rates, this paper resorts to quantile regression analysis to identify the differential effect of regressors at different deciles of the conditional distribution.

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Notes

  1. A longer time period would leave out the firms that enter and exit during the specific time period.

  2. Prowess database does not provide data on number of employees and therefore we cannot perform a robustness check by proxying firm size with number of employees.

  3. The current values of the variables are deflated with output deflators at 2-digit level. The data on 2-digit output deflators are from the Reserve Bank of India’s Handbook of Statistics on the Indian Economy.

  4. Refer Appendix C for NIC codes and respective classification of 2-digit sectors.

  5. The parameters are estimated by maximum likelihood method (MLE) following Bottazzi and Secchi (2011).

  6. The tests are also performed for 3-digit level, which are not reported here. The analysis is restricted to 2-digit level since the number of firms are too small for some sectors in further disaggregation.

  7. The growth rates were computed from five years up to ten years time-lag, the distributional analysis of which is not reported here.

  8. These results are available upon request.

  9. The classification of sectors on the basis of different technological intensity (eg. science-based sector) is adopted from Pavitt (1984).

  10. However, we find similar results also while using a different lag structure, for instance, where the beginning of each sub-period is average of the first two years and the end of each sub-period is the average of the last three years.

  11. We observe that, if the firm exports in the first years, in more than 90 % of the cases, it exports in the next two years as well.

  12. Here, we use the dummy and not R&D intensity (the ratio of R &D over sales) to avoid correlation between R &D and the dependent variable.

  13. The proxy for size is log of domestic sales; the initial size is the size at time t.

  14. Dummy takes value 0 if the firm is Indian-owned and 1 if it is foreign-owned.

  15. Dummy takes separate values for each state for the location of the headquarters of the firm.

  16. The OLS estimates for previous sub-periods gives similar results and are available upon request.

  17. Discussion of the technical details of quantile regression are beyond the scope of this paper. For a technical introduction, refer to Koenker and Basset (1978) and for a non-technical introduction refer to Koenker and Hallock (2001).

  18. The tables with the quantile regression estimates for exports, investment, profitability and R &D are presented in Appendix A.

  19. For instance, in the fourth sub-period, in sector 21 (pharmaceuticals), using OLS estimation, the coefficient for exports was negative, but not significant in explaining firm growth, while quantile regression reveals that the negative effect is significant in the higher quantiles of firm growth distribution.

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Acknowledgments

I thank Prof. Marco Grazzi, Prof. Giovanni Dosi, Prof. Giulio Bottazzi, Dr. Alex Coad, Prof. Davide Fiaschi, Prof. Andrea Mina, Dr. Emanuele Pugliese and several participants at the 9th ENEF meeting in Bologna (2012), IT &FA conference in Pisa (2012), the 8th EMAEE Conference in Nice (2013), the 11th Globelics conference in Ankara (2013) and the 15th Schumpeter Society conference (2014) for their insightful comments. I would like to thank Lorenzo Napolitano for proofreading the paper. I am grateful to the library staff of Jawaharlal Nehru University and Delhi School of Economics for their support and help in data collection process. Thanks to an anonymous referee for the perceptive, motivating and witty (at the same time, kind) comments which indeed strongly persuaded me to work more on the paper. Many suggestions were extremely helpful, not just limited to this paper, but to an overall way of writing and publishing articles. I really wish I could see him/her and offer a beer!

I gratefully acknowledge the research support by the IBIMET-CNR (grant CrisisLab-ProCoPe). Any mistake is my own responsibility.

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Authors and Affiliations

  1. Institute of Economics, Sant’Anna School of Advanced Studies, Piazza Martiri della Libertá 33, 56127, Pisa, Italy

    Nanditha Mathew

  2. IBIMET-CNR, via Giovanni Caproni 8, 50145, Firenze, Italy

    Nanditha Mathew

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Correspondence to Nanditha Mathew.

Appendices

Appendix A: Quantile regression results for profitability, exports, R &D and investment for the period 2006-10

Table 6 Quantile regression estimates for profitability across different sectors for the time period 2006-10
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Table 7 Quantile regression estimates for exports across different sectors for the time period 2006-10
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Table 8 Quantile regression estimates for R &D across different sectors for the time period 2006-10
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Table 9 Quantile regression estimates for investment intensity across different sectors for the time period 2006-10
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Appendix B: Panel estimation for the time period 1990 to 2010

Table 10 Robustness check: Panel estimation for determinants of firm growth for the time period 1990 to 2010
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2.1 Appendix C: National Industrial Classification

Table 11 provides the broad structure according to the latest available national industrial classification (NIC 2008). Since NIC 1987, the classification changed three times, in 1998, 2004 and 2008, respectively. In this work, the data are classified according to NIC 2008 with the help of the respective concordance tables, available from Central Statistical Organization, Ministry of Statistics.

Table 11 National Industrial Classification (2-digit level)
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Mathew, N. Drivers of firm growth: micro-evidence from Indian manufacturing. J Evol Econ 27, 585–611 (2017). https://doi.org/10.1007/s00191-017-0492-x

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