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

Abstract

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.

Can borrowing constraints enhance environmental sustainability? An alternative parametric approach

“…The level of exports tends to ameliorate firm's credit constraints significantly (Campa & Shaver, 2002; Ghosh & Dutta, 2022; Greenaway & Kneller, 2007). Export market participation is associated with adoption of more environmentally sustainable practices by firms to satisfy more sophisticated and environmentally conscious consumers and also to meet the environmental obligations imposed mostly by the developed nations (Banerjee et al, 2021; Cole et al, 2008; Distelhorst & Locke, 2018).…”

Financing Constraints and Corporate Value in China: The Moderating Role of Multinationality and Ownership Type

“…Therefore, MI as a moderating variable is shown to weakly strengthen the negative relationship between the main effects. Column (4) is the estimation result of Equation (8), which is the regression result when only Ownership is added into the model as a moderator variable. The FCI × Ownership coefficient β 2 was −0.009, which is significant at the 1% level.…”

“…As for firm productivity-a sub-category of firm performancefinancing constraints can reduce the total factor productivity of Chinese firms [18] and hinder the growth of productivity of Turkish firms [17]. The research in India shows that when companies face credit constraints, they often choose to decentralize production outsourcing to increase productivity [8]. For firm growth, the work of Du and Nguyen [16] reported on how cognitive financial constraints restrict the growth of Vietnamese firms.…”

“…In emerging markets, in particular, such as Brazil, both countries and companies [2,3] report difficulties in using different financing sources to reduce financing constraints [4]. Research in the Indian market shows that financing constraints not only directly affect the outward foreign direct investment and exports of enterprises [5,6], but also the group affiliation performance and production practices [7,8]. These problems usually require more capital and longer periods of financing, and firms need to overcome more serious financing constraint problems [9].…”

“…The effects of financing constraints in emerging markets have been widely investigated by scholars [11,12]. Regarding the consequences of financing constraints, several factors are considered such as firm investment [13,14], firm size [15], and firm performance; including firm growth [12,16], firm productivity [8,17,18], and firm innovation [19,20]. The literature has expanded our understanding of diverse impacts of financing constraints on firms in emerging economies.…”