Inter-firm linkages and small-scale enterprises: a study of sub-contracting relationships

Abstract

The diversity of inter-firm linkages, networks, alliances, and subcontracting, has thrown up fresh challenges for industrial organization literature. A number of studies attempt to analyses the factors that contribute to the emergence and continuance of such linkages. The present study belongs to the same genre, investigating the nature and correlates of such linkages in small-scale enterprises in a liberalizing economy. Macro-economic policy environment in India has undergone significant changes since I991. Policies affecting small—scale sector per se have also undergone changes. Worldwide, economic liberalization has been associated with firm level restructuring to remain competitive. In India, where small firms have access to cheap Labour and large firms to technology and finance, sub-contracting form of inter-firm linkage may be a useful way of restructuring to reap specialization advantages. From the- small firms’ point of view such linkages provide a variety of advantages like access to raw materials, technology, testing facilities, marketing channels and stable demand. Since large firms at the global level are following fragmentation strategies, there are opportunities for small firms to benefit from these trends. An understanding of factors that facilitate small firms to be part of sub- contracting arrangements, can, therefore, be useful in the current context. This study seeks to explore the nature and determinants of inter-firm linkages undertaken by small firms. The analysis has been undertaken across industry groups (using a large survey data of about 1600 firms spread over the country) and within the Indian auto-components sector. While a variety of inter-firm linkages have been examined, the focus is on sub- contracting relationships. ‘ Thus, the main objective is to focus on the incidence and extent of sub-contracting activities as a form of inter-firm linkage and analyses the firm, industry, and policy level factors that influence small firms’ participation in these arrangements. More specifically, this exploratory study addresses the following questions: i) what type of firms are most likely to have sub-contracting relationships; ii) what firm, industry, and environment characteristics distinguish firms with such linkage from those without them; I m) what are the determinants of the incidence and extent of sub-contracting activities in small scale and auto-components sectors; and iv) does the sub-contracting arrangement influence performance of small firms. Econometric modeling and simple data analysis tools have been used to explore these questions. Key Findings: • Sub-contracting is the most widely prevalent form of inter-fimi linkage across industry groups in SSIs across states; • Within the SSI sector, the incidence of sub—contracting is inversely related to the size of the firm; • Brand ownership and sub-contracting seem to be substitute business strategies; • Apparently, outsourcing firms prefer those small units that have good technical capabilities and managerial practices. Alternatively, sub—contracting linkages facilitate building of capabilities; • Technical education of the entrepreneurs, as a proxy for professional attitude and capability, has a positive influence on sub-contracting activity. Good firm level practices also contribute to sub-contracting activity; • Market Orientation within the domestic economy does not seem to affect the incidence of sub-contracting. However, export orientation does influence sub-contracting negatively, but its impact may vary from sector to sector; • Similarly, nature of competition faced by firms does not seem to have any effect on the incidence of sub-contracting activity; • Product focus of SSIs seems to matter for sub-contracting links. Outsourcing firms prefer the small firms who produce reserved items. Production of reserved items has a positive influence on the incidence and extent of sub-contracting activity. Apparently, reservation policy induces such outsourcing arrangements; • The level of industrialization of the region has a significant positive effect on the incidence and extent of ancillarisation or sub-contracting activities. • There is no consistent relationship between performance parameters (such as profit margin and sales turnover) and incidence and extent of sub-contracting. • Policy initiatives to improve the technological and managerial capabilities of small-scale enterprises are likely to facilitate the growth of sub-contracting relationships between small and large firms.