Academic journal article IUP Journal of Management Research

Productivity in Small and Medium Enterprises of India: A Cobb-Douglas Production Function Approach

Academic journal article IUP Journal of Management Research

Productivity in Small and Medium Enterprises of India: A Cobb-Douglas Production Function Approach

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

Small and Medium-scale Enterprises (SMEs) are widely recognized as the backbone of a country's economy, especially in developing economies. The major points which highlight the importance of SMEs are:

* They are responsible for a majority of the jobs, especially new jobs (OECD Report, 1997; Zhang, 2008; and ASSOCHAM, 2010);

* They have a major share in the Gross Domestic Product (GDP) of a country, and are the engines of growth (Beck et al., 2005; and Schmiemann, 2009);

* They are also seen as a mechanism for alleviating poverty in developing countries where there exists a huge income gap between the rich and the poor;

* They promote inno vation and entrepreneurship (National Kno wledge Commission India, 2007);

* They serve the local consumer demands in a more effective way by producing goods which have limited or seasonal demand, or have to be highly customized, and which many large-scale enterprises may not be interested in producing; and

* They are the important stakeholders of larger enterprises.

In the face of competition and internationalization, the key factor for success for the domestic SMEs and policy makers lies in increasing the productivity.

The importance of productivity to economic growth and development is well established. It remains the basic problem of economic progress, as it is required in the early stages of development, as well as in the permanent process of growth and development. The growth of productivity and employment generally generates higher per capita income. Historical evidence has shown that the economies characterized by high per capita income have had an impressive growth in labor productivity over the past centuries where the major determinants of productivity have been improvement in technology and enhancement in human capital capability (Prakash and Balakrishnan, 2008).

In view of the above, the present paper estimates the productivity of Indian SMEs on the basis of the time series data.

Literature Review

The studies conducted on SMEs in India can be divided broadly into four types: (1) Studies which focus on the operational aspects at the organizational level like Supply Chain Management, Marketing, etc.; (2) Studies which focus on the internationalization of SMEs; (3) Studies which focus on the adoption of ICT by SMEs; and (4) Studies conducted at the aggregate level. The above assertion is based on a review of 76 papers published in various national and international journals spread over the period of 1999 to 2012. Our study falls in the fourth category.

Raj and Mahapatra (2006 and 2009) have examined the interstate variation in growth and productivity performance of organized industrial sector and small manufacturing sector in the pre-reforms and reforms period. They have used growth accounting approach for estimating productivity. Their research is based on the data of annual survey of industries for the period from 1982 to 2003, and the NSSO data for the period from 1978 to 2001 respectively. The study revealed a decline in productivity growth in the organized manufacturing sector as well as in the small manufacturing enterprises during the reforms period, both in India and other chosen states.

Dixit and Pandey (2011), have used the cointegration analysis to examine the causal relationship between SMEs output and India's GDP. The study reveals a positive causality.

Sharma and Sharma (2010) have analyzed the technical and scale efficiency of small industries in India in a state-wise cluster study. They used the DEA under the assumption of variable returns to scale. Most of the states were found to be operating at decreasing returns to scale.

Objectives of the Study

This paper aims to estimate the productivity of Indian SMEs by estimating the Cobb-Douglas production function and marginal productivities of labor and capital from their corresponding output elasticities. …

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