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Do recessions induce Schumpeterian creative destruction? Micro Evidence from India

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  • Saini, Seema
  • Ahmad, Wasim
  • Uddin, Gazi Salah

Abstract

According to the Schumpeterian cleansing hypothesis, economic downturns force inefficient firms off the market, freeing resources that can be allocated to more efficient firms. India, as an emerging economy, may experience a similar reallocation. The study uses micro-level data for publicly traded firms, including manufacturing and services sector firms, from 1988 to 2020. We find that reallocation is productivity-enhancing in general, i.e., credit moves from firms with low productivity to firms with high productivity, and normal economic downturns induce this efficiency-enhancing reallocation. We also observe that reallocation is less efficiency-enhancing during the Indian financial crisis, and constraints on productive firms could be one of the potential explanations for the lack of a cleansing effect.

Suggested Citation

  • Saini, Seema & Ahmad, Wasim & Uddin, Gazi Salah, 2024. "Do recessions induce Schumpeterian creative destruction? Micro Evidence from India," Emerging Markets Review, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:ememar:v:59:y:2024:i:c:s1566014124000013
    DOI: 10.1016/j.ememar.2024.101106
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    More about this item

    Keywords

    Credit reallocation; Productivity; Cleansing effect; Severe economic downturns;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance

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