Does Subcontracting Raise the Firm Size of MSMEs in India? An Empirical Analysis

Micro, small and medium enterprises (MSMEs) are the backbone of a developing country such as India. These enterprises or firms generate huge employment opportunities for the masses. In India, most of the MSMEs are called unorganised firms because the majority of these firms are informal or unregistered. In terms of numbers, India has nearly 20 million informal manufacturing MSMEs, and most of these firms are of the self-employment type. However, encouraging self-employment in MSMEs may not create gainful employment unless these entrepreneurs are connected with broader markets. In this regard, subcontracting with large organised firms may play a pivotal role in enhancing the size of MSMEs, which in turn may increase the likelihood of their becoming larger firms. Against this background, this study uses the unit-level database of the National Sample Survey Organisation during the period 2000–2001 to 2015–2016 to examine this role empirically. We find that the subcontracting firms are more likely to be large-sized firms, more specifically, the establishment-type firm, which hire workers for functioning. Thus, the findings recommend direct government intervention to facilitate subcontracting in the informal manufacturing MSMEs of India.