Small entrepreneurs are important to India’s jobs, structural transformation, gender equality, and inclusive growth. The size of the small entrepreneurs in the unorganized sector is extremely large when compared to large entrepreneurs in the organized sector, or when compared to other countries at a similar stage of development.
More than 90% of entrepreneurs and establishments in the manufacturing sector in India fall in the small enterprises category. More than 80% of employment is generated by small enterprises in the unorganized sector. The large employment share of small enterprise is persistent. It has increased over time. The small enterprises are also stubbornly persistent. This persistence is not due to particular industries or states, as most industries and states show limited change in unorganized sector employment shares. The persistence comes from the fact that fast-growing state-industries witness rising unorganized sector activity. The presence of small entrepreneurs is more pervasive in services than in manufacturing.
The contribution of small enterprises to output, despite the small size and scale at which they operate, is also significant. More than 30% of manufacturing value added is generated by the small entrepreneurs. There is also emerging evidence that small entrepreneurs in the unorganized sector provide important inputs for large enterprises in the organized sector. In 2005, 20% of surveyed unorganized plants reported that they had performed contract work.
Most developing countries have a large population of people working as small entrepreneurs in informal establishments or in self-employment. There is a great deal of debate and interest in designing policies that promote small entrepreneurship and jobs. The biggest barriers faced by them (as well as many large enterprises) are poor physical and human infrastructure. Small enterprises tend to suffer more from these, as they do not have the resources to buy, say, a new power generator like large enterprises do, build their own logistics and transport connectivity due to the small scale of their production, or invest in learning and skills. Removing regulatory barriers to industrial entry can be very successful in stimulating growth and jobs, but it is often secondary, compared to the investments needed to improve human and physical infrastructure to promote entrepreneurship.
Size and persistence of small entrepreneurs: A substantial reason for the persistence in India’s small entrepreneurs in the unorganized manufacturing sector is the rapid increase in female-owned businesses. Had the proportion of women’s participation to male-owned businesses remained the same as in 1994, the unorganized manufacturing sector would have declined in share, rather than increased. Most of these new female-owned businesses are opened in the household and at a small scale, about a third of the size of a typical male-owned business in the informal sector. Yet, it appears that these businesses offer economic opportunities not otherwise present and a transition for some women from unpaid domestic work.
Input usage and productivity: We examined in detail the scale and productivity consequences of varied input use in small and large enterprises in the manufacturing sector, using detailed plant-level data in some 600 districts (Input Usage And Productivity In Indian Manufacturing Plants, Ejaz Ghani, William R. Kerr and Stephen D. O’Connell, World Bank). Counts of distinct material inputs are higher in urban settings than in rural locations, and they are also higher in large enterprises in the organized sector than in small enterprises in the unorganized sector.
At the district level, higher input usage in large enterprises in the organized sector is generally observed in wealthier districts, and those with greater literacy rates. Looking within states, the usage is more closely associated with electricity access, population density, and closer spatial proximity to one of India’s largest cities. Entrepreneurs in the organized sector, utilizing a greater variety of inputs, display higher productivity, with the effects mostly concentrated among smaller plants with fewer than 50 employees. For the small entrepreneurs in the unorganized sector, there is little correlation of input counts and local conditions, for better or for worse, and a more modest link to productivity outcomes.
When we do a breakdown of small enterprises in the unorganized sector into household- and non-household-based establishments, we observe a sharp rise in the prominence of non-household establishments, employment and output. In 1989, household-based establishments comprised more than 75% of unorganized sector employment. This share has declined to below 60%. Trends in output shares are even more striking. In 1989, the two subsectors comprised about equal shares of total unorganized output. This share has changed, with nearly 80% of output being produced by non-household establishments.
Impact of globalization and technology: Evidence suggests that the size and persistence of small entrepreneurs have withstood changes in trade, technology, demographics, urbanization, etc. India’s growth in the manufacturing sector displays two intriguing properties. First, a substantial fraction of absolute and net employment growth is concentrated in small enterprises in the tradable industries, thanks to globalization. Second, much of this growth is connected to the development of one-person establishments. The rapid urbanization of the informal sector plays the strongest role, while there is some evidence for subcontracting by the large enterprises and a “push" entrepreneurship story.
We do find modest connections of this growth to rising female labour force participation. The connection between the presence of small entrepreneurs and local productivity levels is strong, and varies across urban and rural areas in ways that bolster urbanization and subcontracting hypotheses.
Small entrepreneurs are best positioned to create more jobs and tap into India’s demographic dividend. Mass-scaling of small entrepreneurship requires scaling up of investments in human capital and physical infrastructure.
Ejaz Ghani is lead economist at the World Bank.