|
Working Paper
| HBS Working Paper Series
| 2012
Deregulation, Misallocation, and Size: Evidence from India
by
Laura Alfaro and Anusha Chari
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Abstract
This paper examines the impact of the deregulation of compulsory industrial licensing in India on firm-size dynamics and the reallocation of resources within industries over time. Following deregulation, we find that the extent of resource misallocation declines and a considerable thickening of the left-hand tail of the firm-size distribution suggesting a significant increase in the number of small firms. However, the dominance and growth of large incumbents remains unchallenged. Quantile regressions reveal that the distributional effects of deregulation on firm size are significantly non-linear. The size distribution we observe—namely, a large number of small firms and a small number of large firms—can be characterized as the "missing middle" in Indian manufacturing and suggests that small firms may continue to face constraints in their attempts to grow.
Keywords: Capital Budgeting;
Markets;
Economic Growth;
Governing Rules, Regulations, and Reforms;
Business and Government Relations;
Development Economics;
Production;
Performance Capacity;
Business Strategy;
India;