Determinants of innovation and interactive learning in informal manufacturing enterprises in India

Abstract

In the context of globalization, the informal sector enterprises are also exposed to international competition; and therefore, they need to remain productive and competitive. In this regard, innovation is an obvious strategic choice at the firm level. Drawing from the data gathered through an extensive field survey in NCT-Delhi, India, this study observes that innovation activities in the informal enterprises take place mostly through non-research-and-development routes and rely more on interactive learning and learning by doing. The econometric analysis shows that formal interactions through subcontracting and membership in the industrial associations along with informal interactions with other firms, buyer–supplier interactions, and social capital are having positive and significant influence on product, process, and marketing innovation. However, this study reveals that formal interactions play a vital role in introducing marketing innovations. Further, the results show the essential role of in-house training, entrepreneurial expertise, and information communication technology usage at the firm level. Thus, the paper provides empirical evidence reiterating the importance of integrating informal manufacturing enterprises and their learning processes as the key components of the innovation system in India.

Subcontracting and enterprise development in India's informal manufacturing sector

“…Informal firms operate in the same socioeconomic environment as the formal firms, and in a symbiotic relationship with them (Maiti, 2008). Following the trend of the latter, many have conceived informal entrepreneurship as a repository of local knowledge, creativity and innovation (ILO, 2018; Shekar and Joseph, 2022). However, subcontracting linkages with formal and large enterprises might drive the product development and capacity building in informal sector through the top-down diffusion of technical knowhow and market accessibility (Shekar, 2021).…”

“…Following the trend of the latter, many have conceived informal entrepreneurship as a repository of local knowledge, creativity and innovation (ILO, 2018;Shekar and Joseph, 2022). However, subcontracting linkages with formal and large enterprises might drive the product development and capacity building in informal sector through the top-down diffusion of technical knowhow and market accessibility (Shekar, 2021). Roy (2019) highlights that the exclusive rights of knowledge inputs and innovation outcomes of the formal sector, through patenting and other property rights might hinder the informal entrepreneurs to reap the benefits of their innovation activities.…”

“…Ranis and Stewart (1999), Marjit (2003) and Moreno-Monroy et al (2014) argue that formal enterprises subcontract to only the modern efficient and technologically advanced informal enterprises. This is because subcontracting decisions are taken not just to reap the labour cost advantages of the informal sector, but also to ensure no compromise on the quality of the product to increase competitiveness and implement growth-oriented strategies (Shekar, 2021). Hence, it has been argued that when the formal sector subcontracts to the modern informal enterprises, subcontracting has been found to be beneficial and it also leads to the modernization of the informal sector with improved technology and productivity levels.…”

“…In contrast, the informal sector has contributed significantly to the economy, not just in gross output terms but also as an absorber of periodic economic shocks by acting as the employer of last resort. Moreover, its products are available at a lower cost thereby serving people in lower-income groups and facilitating employment growth since small firms integrate vertically, thus raising employment to sales ratio (Williamson, 1975; Shekar and Joseph, 2022). As per the Central Statistics Office, the share of micro, small and medium enterprise (MSME) gross value added (GVA) in GDP was 30.5 and 30%, respectively, for 2018–19 and 2019–20 at current prices (2011–12).…”

“…Many studies based on this fact inferred that increase in subcontracting linkages between the formal and informal enterprises is becoming a prominent survivalist strategy for the enterprises in the informal manufacturing sector (Kathuria et al. , 2010; Rani and Unni, 2004; Nouroz, 2001; Goldar, 2004; Shekar and Joseph, 2022).…”