Small firms' Dynamism & the Organizational Forms: Nature of 'Young-Kaldor Industrialization'.

AuthorPadhi, Satya Prasad


The present focus is on understanding the developed status of countries that typifies the existence of a larger set of dynamic small firms that contribute to innovations and advanced growth in countries. As a policy focus, the present paper takes up an argument in which the advanced growth is mainly driven by a dynamic learning by doing process that should underpin the role of small firms. In this focus, even if the small firms have the ability to take forward learning by doing-led innovations, they face serious constraints and the focus should zero in on the organization form of the firms that supports the dynamism. The organizational form would highlight the symbiotic inter-linkages between small and large firms in which the growth oriented larger firms provide the scope for the dynamism of small firms that reinforces large firms' greater competitiveness and resource augmentations that sustain advanced growth. The focus then is on the organizational form that stresses this nexus of the firms.

The present paper would endeavor to illustrate that a favorable macro growth environment that sheds light on a proper industrialization is important in highlighting the dynamic organization forms of small firms. A discussion on alternative growth perspectives therefore assumes significance. There is the urban-bias literature that elaborates on how a prior developed agriculture induces the proper industrialization and growth. The present paper however zeros in on an alternative Keynesian (Young, 1928; Kaldor, 1972; also see, Padhi, 2019) cumulative causation perspective that would emphasize on an autonomous role of industrialization that induces the endogenous growth of innovations in terms of constant coming up of specializations and knowledge.

At the outset, it is true; in a developing country context of initial higher share of agriculture, a lack of proper, developed agriculture would highlight the larger existence of small rural firms in non-prosperous small cities/towns/ villages who face skill/finance constraints. In trying to explain the situation, the existing literature on urban bias thesis provides an argument (perhaps, a pre-Keynesian one) that industrialization programs if autonomous and does not follow prior developed status of agriculture results in urban bias. This would highlight a resource diversion towards industrialization that amounts to a misallocation of resources and inhibits the proper development of agriculture. In this argument, the proper developed agriculture not only can provide demand support for non-farm activities in the vicinity, but also, importantly, through various inter-linkages, could have had led to development of proper industrialization and developed status of small firms in urban areas. One implication is that the underdeveloped status of small firms, mostly referring to firms engaged in non-farm activities in rural areas, is linked to some form of urban bias. And, commenting on the persistent state of the continuing debate on urban bias, Corbridge and Jones (2009: 30) have this to say: "Where does this leave us? When Winston Churchill worried about the force of his speeches in Parliament, he reminded himself to "shout here [because] the argument is weak'. We detect more than a fair bit of shouting in the debates around urban (rural) bias. Overman and Venables (2005:5) very properly note that positive (clustering/ spillover effects) and negative (rent seeking/urban bias) hypotheses about city growth in the developing world "are not mutually exclusive; both operate to varying degrees in different countries and cities". We say Amen to that. Academics are notorious in some quarters for sitting on the fence, but there is no case for opting for the urban bias thesis or its 'opposite' in the round and in all respects. Forms of politics or public policy that steamroller over local realities in the name of theoretical purity do not help poorer people."

To this, the present paper's comment would be a big 'hallo', in response. The above observation gives primacy to the importance of 'local politics' and how they shape agriculture. That is, this thesis (Varshney, 1993) would hold that industrialization (and urbanization) requires a resource reallocation from pre-existing (as a historical fact) agriculture; it is up to the local politics to decide whether it amounts to transferring a surplus (without reducing agricultural production) or a squeeze (that hurts agriculture). In the former case, it helps proper industrialization and in the latter case, as in the case of the developing countries, it hurts both. This in fact amounts to a thesis that industrialization can go either way, all depending on local politics' decisions with respect to agriculture.

The present paper's (quite strong) reservation is that the argument gives rather an active role to 'local politics' that would shape up agriculture, which in turn defines the possibility of rural development via modernization of agriculture. It gives a passive role to 'industrialization'.

In an alternative reasoning, the present paper's initial hypothesis would be: it is proper industrialization supporting an advanced form of inter-linkages can directly benefit small firms; indirectly it also supports rural development via its impact in terms of brining in the modernization of agriculture (and its spillover effects).

A discussion on the nature of industrialization is pertinent. Sometimes, industrialization can be seen to be based entirely on prior savings-based reallocation (or redirection) of existing resources; but then, it can hardly be growth promoting, and can involve the dysfunctional rent seeking behavior, aggravating urban rural divide.

However, industrialization can also underline a cumulative causation that supports its autonomous, endogenous development. The focus zeros in on expansions that embody some newness, some inventions--Young (1928) and Krugman (1991) would provide different perspectives, but the common emphasis is on constant coming up of newness in terms of specializations that embody specialized intermediate goods and labor force. The present paper would rely more on the Kaldorian elaboration of Young (Kaldor, 1972) in which the specializations translate into finance-led independent new investment opportunities (i.e. new resource creations) that add to the market size in the Keynesian fashion, supporting further growth of specializations as Keynesian supply responses and so on.

The present paper would argue that this Keynesian Youngian perspective provides insight into the process of growth of specializations in which different firms specialize in different categories and the resultant dynamic nexus between large and small firms supports the coming up of further new specializations.

In this reasoning, the endogenous growth of specializations and knowledge-based capital and intermediate goods industries can induce a developed surplus producing agriculture that would also, based on its own developed inter-linkages, support rural development; but the paper goes beyond it to underscore the possibility that the industrialization would highlight dynamic organization forms that in turn can support dynamic small-large firms nexus.

Given this initial understanding, the present paper develops an argument in which the proper growth would support the dynamism of smaller firms and such industrialization, with possible urban-rural dynamic linkages, adds to growth. No doubt, an only larger firm centric growth could raise issues, but as would be argued in this paper, a dynamic nexus of small and large firms in fact reinforces innovation-led proper growth momentum.

Though the present paper aims as an Indian study, there may not be any direct existing empirical support for this thesis; but then, the issue is one of what should be the nature of industrialization, rather than a study of existing industrialization outcomes. To take up this issue, the paper is organized as follows. First, we would discuss the basic hypothesis of the present paper concerning the possible dynamism of smaller firms and their role in advanced growth processes and compares it with the existing literature's focus on the dynamism. We would then take up the broader debate on growth and illustrates how whether growth results in a dysfunctional urban bias or brings in dynamic large and small firm nexus depends on the nature of industrialization. This was followed by the issue of how a proper growth process supports dynamics of small and large firms' nexus and how the nexus in turn reinforces growth. we are then concerned with the implications of possible urban-rural mobility that dynamic organizational form of firms involve. Finally we conclude on the broader policy issues.

Importance of Growth & Dynamism of Small Firms

At the outset, some basic hypotheses developed in the present paper need mention. The present paper endeavors to extend the story of cumulative causation that particularly highlights the importance of external economies. The emphasis is on the Keynesian Young-Kaldor cumulative causation (Padhi, 2019). External economies translate isolated new micro supply response involving specializations into a macro supply response and the resultant new finance-led macro investment adds to the market size (and learning by doing) to add to growth of further macro investment-led new specializations and so on.

Krugman (1991) adds a supply side perspective in which existence of some developed status with respect to availability of specialized inputs and labor supply adds to new specializations that in turn adds force to the "availabilities", and so on. If this perspective underlines the incentives that guide reallocation of existing resources (firms) to add to specializations, the above Keynesian version relies on how the incentives structure mobilization of new resources (firms) that can reinforce macro investment climate and growth (Padhi...

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