Sme Entrepreneurship, Firm Performance, and Corporate Governance Practices in Indian Service Firms

By Raja, J.; Kumar, A. Suresh | Journal of Services Research, October-March 2007 | Go to article overview

Sme Entrepreneurship, Firm Performance, and Corporate Governance Practices in Indian Service Firms


Raja, J., Kumar, A. Suresh, Journal of Services Research


This paper shows an important relationship between Indian private service firms' corporate governance practices and firm performance for sample firms from Bombay Stock Exchange (BSE) Small CAP Index. The underlying assumption, is unlike affiliate and foreign service firms, Indian Private service firms' corporate governance implementation is unaffected by any other external forces. So, the final sample consists only of Indian private service firms and these firms have been classified as SME based on market capitalization. The research hypothesis has been constructed to prove that corporate governance practices in Indian service firms have positive influence on firm performance. In this regard, the factor analysis is used to reduce the corporate governance data into meaningful factors. Subsequently, factor analysis results are submitted for OLS regression analysis. It is evident from the analysis that corporate governance data are grouped under four different factors: ownership component, board component, committee component, and board procedure component. OLS regression analysis proved that committee component has statistically significant relationship with firm performance. It is concluded that corporate governance practices in the Indian service firms have positively influenced the firm performance.

INTRODUCTION

World over, the SME sector has grown rapidly over the years and contributes almost 40 percent of the total industrial output. This sector has occupied an important position in generating revenue for countries because the growth rate in this sector has consistently been higher than the average industrial growth rate. At present, there are three sectors recognized by the government of India: cottage and tiny industry, small-scale industry, and large-scale industry. However, a definition exists only for tiny and small units, medium sized enterprises are not defined either technically or legally. But, Confederation of Indian industry (CII) an independent agency in India has recognized a firm with Rs.1 crore (Rs 10 million) investment as a SME. The definition used by CII is based on the level of investment in plant, machinery or other fixed assets whether held on an ownership, lease or hire purchase basis. It seeks to keep in view the socio economic environment in India, where capital is scarce and labor is abundant. The SME in India characterized by low capitalization and limited assets, geographical diversity and high mortality, poor access to capital markets, cash intensity in transactions, lack of credit information, poor financial disclosure on account of tax issues, directed lending based on central Bank guidelines, high risk perception has led to high borrowing costs

In spite of all these limitations, SMEs in India are reckoned as one of the most vibrant sectors of the economy. Over the years, this sector has played a significant role in the development of Indian industry. It contributes 95 percent of industry establishments, 40 percent of domestic exports, and 35 percent of industry sector in the year 2003. In India, the SMEs account for US$ 60 billion export earnings and it is estimated to be nearly 25 percent of total exports. This is one of the fastest growing sectors in India. In this paper, an attempt has been made to study the corporate governance practices in Indian private (non-group and unaffiliated) service firms. The reason behind choosing private service firms is that corporate governance practices have not been influenced by any other factors. For example, if it is group affiliated firms then parent company is in good position to influence the corporate governance practices. In case of foreign private firms, international norms for corporate governance may already be in practice. Past literature has already established relationship between groups affiliated firms corporate governance practices and firm performance. So, the authors decided to take the new entrepreneurship classification to study the relationship between corporate governance practices and firm performance. …

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