How does Subcontracting Affect the Performance of the Informal Enterprise? Source of Advancement or Exploitation?

Abstract

In recent times, both developing and developed countries have witnessed the existence of the informal economy along with its formal counterpart, and India is not an exception. The informal sector is significant to the Indian economy in terms of its contribution to GDP and employment generation. Therefore, evaluating the performance of this sector is important in terms of the growth of the Indian economy for further policy formulation. This study is purported to examine the performance of the informal enterprises in the Indian economy. The performance of informal enterprises is examined across a variety of factors, including ownership type, location, sector, enterprise type, and so on, to get a more complete picture. In addition, it is also analysing the determining factors of informal firm performance, paying particular attention to the outsourcing or subcontracting of the informal firms in all the subsegments. The study has used ordinary least squares (OLS) regression to examine the determining factors. For the empirical analysis, it has used National Sample Survey 73rd Round (2015–2016) microdata on unincorporated non-agricultural enterprises. The results show that urban informal enterprises are performing well compared to their rural counterparts, though inter and intra-sectoral heterogeneity has been observed across ownership type, location, sector, and enterprise type. It is also noticed that formal–informal interlinkage in terms of subcontracting is mostly exploitative in nature, with only a tiny portion of the informal enterprises benefiting from it. Subcontracting has a negative impact on the performance of rural enterprises, but it has a mixed effect on the performance of urban informal firms.