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Determinants and impacts of subcontracting: evidence from India's unorganized manufacturing sector

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  • Amit Basole
  • Deepankar Basu
  • Rajesh Bhattacharya

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 (2005-2006). 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.

Suggested Citation

  • Amit Basole & Deepankar Basu & Rajesh Bhattacharya, 2015. "Determinants and impacts of subcontracting: evidence from India's unorganized manufacturing sector," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(3), pages 374-402, May.
  • Handle: RePEc:taf:irapec:v:29:y:2015:i:3:p:374-402
    DOI: 10.1080/02692171.2014.1001324
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    References listed on IDEAS

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    1. Rania Antonopoulos & Indira Hirway, 2010. "Unpaid Work and the Economy," Palgrave Macmillan Books, in: Rania Antonopoulos & Indira Hirway (ed.), Unpaid Work and the Economy, chapter 1, pages 1-21, Palgrave Macmillan.
    2. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
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    1. Shashwati Banerjee & Kishor Goswami, 2020. "Self-employed or Paid Employed: Who can Earn more among the Slum Dwellers and Why?," Progress in Development Studies, , vol. 20(1), pages 7-25, January.
    2. Kasturi Sadhu & Saumya Chakrabarti, 2021. "Neo-Dualism: Accumulation, Distress, and Proliferation of a Fissured Informality," Review of Radical Political Economics, Union for Radical Political Economics, vol. 53(4), pages 694-724, December.
    3. Oyvat, Cem, 2016. "Agrarian Structures, Urbanization, and Inequality," World Development, Elsevier, vol. 83(C), pages 207-230.
    4. Nataraj, Manikantha & Bhattacharya, Soham, 2020. "Bitter Convergence: Contemporary Crisis of Labour in Rural West Bengal," MPRA Paper 103363, University Library of Munich, Germany.
    5. Manikantha Nataraj & Soham Bhattacharya, 2023. "Bitter Convergence: Contemporary Crisis of Labour in Rural West Bengal," BASE University Working Papers 17/2023, BASE University, Bengaluru, India.
    6. Surbhi Kesar & Snehashish Bhattacharya, 2020. "Dualism and Structural Transformation: The Informal Manufacturing Sector in India," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 32(3), pages 560-586, July.
    7. Snehashish Bhattacharya & Surbhi Kesar, 2018. "Possibilities of Transformation: The Informal Sector in India," Review of Radical Political Economics, Union for Radical Political Economics, vol. 50(4), pages 727-735, December.
    8. Surbhi Kesar, 2024. "Subcontracting Linkages in India's Informal Economy," Development and Change, International Institute of Social Studies, vol. 55(1), pages 38-75, January.

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