Most firms in India and other developing countries are family-owned and often shun outside managers and that is why even successful businesses fail to grow in such countries, a new study suggests. The study shows that the lack of managerial delegation factors significantly into why businesses in India tend to stay small and this has wider implications on the country’s economy, constraining innovation, economic growth, and per capita income.
“Our analysis confirms that the absence of managerial delegation is a significant factor in why successful Indian businesses fail to grow, which reduces the overall productivity of the country’s economy,” said researcher Michael Peters from Yale University.
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If Indian businesses used outside managers as efficiently as US businesses, it would boost economic productivity in India and increase the country’s per capita income by about 11 percent, according to the study published in the journal American Economic Review. For the study, the researchers focused their analysis on this disparity between size of firms in developed and developing countries.
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They created a quantitative model that centers on the role of managerial delegation in firm growth. It incorporated plant-level data from the US and India and was calibrated to recognize that businesses in India might face higher barriers to growth, such as having less access to start-up capital than US businesses. In India, more than 9 out of 10 manufacturing businesses have fewer than four employees, and those small firms account for more than half of total employment.
In contrast, two-thirds of US manufacturing employment is concentrated in establishments with at least 100 employees, and only one-third of firms have fewer than four employees, according to the study. The researchers found that India’s economy suffers from “a lack of selection” — the process of creative destruction through which successful firms expand while unproductive firms close or are swallowed up by the competitors — allowing unproductive businesses to survive because successful businesses do not expand. (IANS)