Credit Constraints and Increased Firm-level Production Fragmentation: Evidence from India

Previous studies have underlined various rationales for production fragmentation from wage differentials, decreased trade costs, access to specialized skills and resources, access to new markets, and benevolent government policies, to technological advancement. However, the idea that a firm’s financing structure can influence its production structure remains less explored, more so empirically. Firms that are financially constrained find it difficult to complete the entire production process in-house and therefore tend to resort to production fragmentation. The current study investigates this link between the extent of credit constraints faced by firms and their outsourcing behavior using data from Indian manufacturing firms over a period of ten years. We also separately study this linkage for firms that tend to export more vis-à-vis firms that export less, to ascertain if increased exporting have relaxed the financial constraint of the firms. The results confirm the positive effect of credit constraints on outsourcing behavior. For a robustness check, subsample regressions and alternative measures of constraints are also analyzed. The study has important policy implications for developing countries such as India, where outsourcing may prove to be a profitable reorganization strategy for firms that are financially constrained.

An extended approach to value chain analysis

In the article, we propose a comprehensive methodology of value chain analysis in the international input–output framework that introduces a new measure of value chain participation and an extended typology of value chains, with the novel inclusion of domestic value chain to address the extent of fragmentation of purely domestic production. This allows for the simultaneous analysis of both global and domestic production fragmentation, the complex patterns of their evolution and their impact on economic development. The main contribution of the proposed methodology is conceptual: it permits the measurement of all value chain paths that pass through each country-sector from production to final consumption, whether the path includes downstream linkages, upstream linkages or their combination. Empirical application of this methodology shows the importance of including domestic fragmentation in value chain analysis: The fragmentation of both global and domestic levels of production has a significant positive correlation with economic growth. This implies that the effects of global production fragmentation must be analysed together with the changing structure of the fragmentation of domestic production to obtain the whole picture, one that might provide important information for policymaking and industrial policy.

An Extended Approach to Value Chain Analysis

In the article, we propose a comprehensive methodology of value chain analysis in the international input-output framework, introducing a new measure of value chain participation and an extended typology of value chains, including a new measure of fragmentation of domestic value chain production. This allows for the simultaneous analysis of both global and domestic production fragmentation, complex patterns of their evolution and their impact on economic development. The main contribution of the proposed methodology is conceptual: it allows the measurement of all value chain paths that pass through each country-sector from production to final consumption, whether the path includes downstream linkages, upstream linkages or a combination of both at the same time. The empirical application of this methodology shows the importance of including domestic fragmentation in value chain analyses: Both global and domestic fragmentation levels of production show a significant positive correlation with economic growth. This implies that the effects of global production fragmentation need to be analysed together with the changing structure of domestic production fragmentation to obtain a complete picture, which could provide important information for policy-making and industrial policy.