small firms in turn hampers export performance since such firms have no incentive to invest in searching for and developing large markets abroad. Instead, it is far more cost-effective for them to sell their wares in the local market.
In recent important research, Hasan and Jandoc (2012) analyze the firm-size distribution of some major sectors, such as apparel, automobiles, and auto parts, that represent the highly labor- and capital-intensive sectors, respectively. 5 Their work sheds new light on the structure of Indian manufacturing that we have already sketched.
Combining the data on the firms in the organized as well as unorganized manufacturing, Hasan and Jandoc (2012) first show that an astonishing 84 percent of the workers in all manufacturing in India were employed in firms with forty-nine or fewer workers in 2005. Large firms, defined as those employing two hundred or more workers, accounted for only 10.5 percent of manufacturing workforce. In contrast, small-and large-scale firms employed 25 percent and 52 percent of the workers, respectively, in China in the same year.
Upon disaggregation by sectors, Hasan and Jandoc find that the firm-size distribution in India is skewed toward even smaller enterprises in the labor-intensive sectors, with the large firms concentrated in the capital-intensive sectors. Thus, workers in the highly labor-intensive apparel sector are concentrated almost entirely in the small firms, with 92.4 percent of workers in firms with fifty or fewer workers. This distribution contrasts sharply with that in China where medium-and large-scale firms account for a gigantic 87.7 percent of the apparel employment (see Figure 8.2 ). The firm-size distribution in apparel in India also contrasts sharply with the more capital-intensive auto and auto-parts sector within the country, in which large-scale firms employed 50.3 percent of all workers in the sector in 2005 (see Figure 8.3 ).
Figure 8.2. Employment share by firm size in apparel in China and India, 2005
Source: Hasan and Jandoc (2010)
The near-absence of medium and large firms in apparel, especially when compared with China, is clearly linked to this sectorâs poor export performance. The inability to massively capture the export markets in this major sector with comparative advantage is in turn linked to the poor performance of labor-intensive manufacturing and therefore manufacturing in general. The ultimate key to understanding why growth has not been as inclusive in India as in South Korea, Taiwan, and China remains the absence of large-scale firms in the labor-intensive sectors in India.
Figure 8.3. Employment shares by firm size in apparel versus motor vehicles and motor parts, 2005
Source: Hasan and Jandoc (2012)
The Neglect of Labor and Land Market Reforms
Why have the reforms so far not done more to produce medium- and large-scale firms in the labor-intensive sectors and hence to create many more well-paid jobs in the economy while boosting exports? The most plausible explanation is that the reforms have been confined principally to product markets (with a limited attention paid to capital-market liberalization). Multiple layers of regulation in the remaining two major factor markets, labor and land, continue to discourage the growth of manufacturing in general and of unskilled-labor-intensive products in particular.
The past reforms have removed four important layers of regulation in the product and capital markets:
       ⢠  Investment licensing, which prevented large firms from investing outside of the highly capital-intensive âcoreâ industries, has been eliminated
       ⢠  Protection, which had prevented firms from exploiting large world markets, has been substantially removed from industry and services, though agriculture remains heavily protected
       ⢠  The door to foreign firms with
In recent important research, Hasan and Jandoc (2012) analyze the firm-size distribution of some major sectors, such as apparel, automobiles, and auto parts, that represent the highly labor- and capital-intensive sectors, respectively. 5 Their work sheds new light on the structure of Indian manufacturing that we have already sketched.
Combining the data on the firms in the organized as well as unorganized manufacturing, Hasan and Jandoc (2012) first show that an astonishing 84 percent of the workers in all manufacturing in India were employed in firms with forty-nine or fewer workers in 2005. Large firms, defined as those employing two hundred or more workers, accounted for only 10.5 percent of manufacturing workforce. In contrast, small-and large-scale firms employed 25 percent and 52 percent of the workers, respectively, in China in the same year.
Upon disaggregation by sectors, Hasan and Jandoc find that the firm-size distribution in India is skewed toward even smaller enterprises in the labor-intensive sectors, with the large firms concentrated in the capital-intensive sectors. Thus, workers in the highly labor-intensive apparel sector are concentrated almost entirely in the small firms, with 92.4 percent of workers in firms with fifty or fewer workers. This distribution contrasts sharply with that in China where medium-and large-scale firms account for a gigantic 87.7 percent of the apparel employment (see Figure 8.2 ). The firm-size distribution in apparel in India also contrasts sharply with the more capital-intensive auto and auto-parts sector within the country, in which large-scale firms employed 50.3 percent of all workers in the sector in 2005 (see Figure 8.3 ).
Figure 8.2. Employment share by firm size in apparel in China and India, 2005
Source: Hasan and Jandoc (2010)
The near-absence of medium and large firms in apparel, especially when compared with China, is clearly linked to this sectorâs poor export performance. The inability to massively capture the export markets in this major sector with comparative advantage is in turn linked to the poor performance of labor-intensive manufacturing and therefore manufacturing in general. The ultimate key to understanding why growth has not been as inclusive in India as in South Korea, Taiwan, and China remains the absence of large-scale firms in the labor-intensive sectors in India.
Figure 8.3. Employment shares by firm size in apparel versus motor vehicles and motor parts, 2005
Source: Hasan and Jandoc (2012)
The Neglect of Labor and Land Market Reforms
Why have the reforms so far not done more to produce medium- and large-scale firms in the labor-intensive sectors and hence to create many more well-paid jobs in the economy while boosting exports? The most plausible explanation is that the reforms have been confined principally to product markets (with a limited attention paid to capital-market liberalization). Multiple layers of regulation in the remaining two major factor markets, labor and land, continue to discourage the growth of manufacturing in general and of unskilled-labor-intensive products in particular.
The past reforms have removed four important layers of regulation in the product and capital markets:
       ⢠  Investment licensing, which prevented large firms from investing outside of the highly capital-intensive âcoreâ industries, has been eliminated
       ⢠  Protection, which had prevented firms from exploiting large world markets, has been substantially removed from industry and services, though agriculture remains heavily protected
       ⢠  The door to foreign firms with
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