Journal of Business Venturing 19 (2004) 107 125

The hidden hand and the license raj to An evaluation of the relationship between age and the growth of firms in India
Sumit K. Majumdar*
The Management School, Imperial College of Science, Technology and Medicine, 53 Princes Gate, Exhibition Road, London SW7 2PG, UK

Abstract The study that this article reports on considers the consequences of nationally variable macroinstitutional environments, and the implications of major alterations in such environments, on organizational level behavior and performance. Specifically, it examines the relationship between firm age and growth for a large sample of Indian firms using contemporary data. Firms are classified as falling into three specific categories: those incorporated, or born, prior to 1956; those incorporated between 1956 and 1980; and those incorporated after 1980. Each of these selected periods defines and denotes specific policy regimes affecting Indian industry. These policy regimes have been dictated by the national macroinstitutional environmental considerations that were in existence for the Indian economy. No significant relationship is established between the age variable and growth for firms incorporated prior to 1956, while a negative relationship is established between the age variable and growth for firms incorporated between 1956 and 1980. These were the years when the command and control industrial policy regime, popularly known as the license raj, was in operation in India. Conversely, for firms incorporated after 1980 when market forces began to be encouraged, and the hidden hand started becoming visible to some degree in the Indian context, the age and growth relationship is established to be positive. The evidence suggests that entrepreneurial behavior is an extremely important feature of contemporary Indian industry. Recent anecdotes about Indian firms, particularly in the information technology sector, suggest that there has been a resurgence of industrial activity in the country. These beliefs are well borne out by the large-scale empirical analysis that this article reports on. The younger Indian firms, those which have not been imprinted by the taints of a command and

Tel.: +44-20-759-49172; fax: +44-20-782-37685. E-mail address: s.majumdar@ic.ac.uk (S.K. Majumdar). 0883-9026/$ see front matter D 2002 Published by Elsevier Science Inc. doi:10.1016/S0883-9026(02)00115-5

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control regime, are going to drive Indias industrial progress forward. The hidden hand is alive and well in India. Conversely, older firms, which might seem to possess a stock of capabilities developed over time, are going to find that these are unlikely to be readily deployable in the future. Older firms might have had the attributes that led to corporate success in an environment where rent seeking was the norm. In the present milieu, such abilities are not conducive to corporate progress. In particular, the license raj firms have no capability to succeed, as shown by the negative age and growth relationship. Additionally, the relationship between size and the growth of Indian firms is found to be negative. This suggests that a process of industrial fragmentation may be taking place in Indian industry, with small firms growing faster than larger firms and reducing the importance of larger firms in Indian industry. This has important implications for the future competitiveness of Indian industry. D 2002 Published by Elsevier Science Inc.
Keywords: Hidden hand; License raj; India

1. Introduction Are younger firm more entrepreneurial and nimble; and do such firms grow faster than the older ones? Or are older firms more experienced in exploiting emergent opportunities and can thus display relatively superior growth rates? These are important questions with respect to the growth of firms. Yet these are questions in respect of which relatively little evidence exists, particularly in emerging market economies. In addition, we do not know whether there are general empirical patterns between age and growth that generally exist, or whether the evolving unique institutional circumstances in each economic environment dictate the patterns of firm growth that are empirically established. The issue of what sorts of firms show superior growth abilities becomes extremely relevant for prognosticating on the evolution of industrial structure of a country. For any useful prognostication of the future patterns of industrial evolution to take place, for various countries, it is necessary to have some sense of what the relationship is between the era of birth and the growth patterns displayed by firms. If the younger firms show superior growth rates, then it is one indication that the entrepreneurial process is alive in that country. If, on the other hand, older firms show superior growth rates, then it is an indication that the contemporary economic environment is not conducive to the growth of newer firms. This paper examines the relationship between age and growth patterns for a large crosssection of firms in India. The age of firms is a critical variable in the Indian context, as indeed it is in any other, since the age variable is a function of the era of birth. A firms era of birth can have a significant influence on its subsequent performance, as is acknowledged in the literature. Postindependence industrial policy regimes in India are classified by three eras (Ahluwalia, 1985; Majumdar, 1996). These eras are likely to cause variations in firms behavior and performance.

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1.1. Era 1 The first era includes the period up to 1956, before the industrial policy resolution was passed in which the role of the state as manager of industrial progress was articulated in detail. 1.2. Era 2 The second era, between 1956 and 1980, is one when the full force of the command and control regime was felt, following the promulgation of the industrial policy resolution of 1956. This era has been popularly called the license raj. It was an era of rent seeking. 1.3. Era 3 The third era, the period starting after 1980, is when reforms by stealth (Bhagwati, 1993) commenced. In the third, era the roles of market forces, competition, and entrepreneurship were explicitly recognized by the government as the fundamental drivers of industrial progress (Marathe, 1989). This was an era of the hidden hand, where the pursuit of the profit motive, using firm-level capabilities to cater to market demand, was put into place. Classifying eras according to the above categories also helps assess the role of command and control regimes versus market forces in influencing firms behavior. Guha (1990) has noted that whether market mechanisms are more successful in fuelling growth, or control over economic activities yields better results has rested on the ability of one system to mobilize incentives. The issue of whether free markets, or command and control systems generate the right incentives so as to induce superior growth and performance by firms becomes an issue that depends on the nature of policies in place. Items that figure in industrial policy lists can be macro-oriented: the role and weight assigned to light, medium, and heavy industries; ownership patterns desired; the roles of foreign capital, foreign technology, and institutional finance; and location guidelines. At microlevels, where impact on firms growth patterns is observed, issues can relate to: the operating size of units and scale, maximum production possible given market demand and factorsupply conditions, and choice of operating technologies permissible to firms. In addition, a major element includes an appraisal mechanism to monitor progress according to the stated objectives (Marathe, 1989). Whether Indian industrial policy eras have marshaled the right sort of incentives that influence economic agents to maximize firm level outcomes remains an empirical question which we evaluate in this paper.

2. Theoretical and empirical issues Two conceptual questions arise. The first conceptual question is: What is the relationship between a firms age and its performance, of which one of the key measures is growth? The second conceptual question is: Why should a specific era in which firms are born influence

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their subsequent growth patterns? On the first question, one view holds that younger firms suffer from a liability of newness (Stinchcombe, 1965). Efficient organization requires trust within an organization and its members, which takes time to build. Additionally, the setting up of routines, learning about the environment, and developing relationships with other firms and organizations in the external environment take time. Once these routines and relationships are established, the organizational forms established for the firms become reliable and faithfully reproducible. Additionally, mature organizations have the ability to withstand shocks that may hurt newer organizations. Mature organizations, in such circumstances, can draw on a selection of skills that can enable them to make adjustments to a changing milieu. There is an equally widespread belief that older firms are prone to inertia, and the bureaucratic ossification that goes along with age. Thus, these firms are unlikely to have the flexibility to make rapid adjustments to changing circumstances, and are likely to lose out in the performance stakes to younger and more agile firms (Marshall, 1920). In older firms, the decision-making process becomes ever more difficult and less timely. Age means a loss of agility and responsiveness, so that new opportunities are missed, and contemporary dangers not avoided. There is, thus, a liability of senescence (Barron et al., 1994), with the growth process being slowed down. Contemporary models also demonstrate an inverse growth and age relationship. A general version of the Jovanovic (1982) model predicts that, holding size constant, growth decreases with firm age. As inertial forces become strong within firms over time, then organizations become locked-in to strategies and structures adopted during the earlier years. Firms accumulate routines and rules that become durable over time. While such durable routines and rules can be reproducible, this reproducibility may not serve any useful purpose since the routines and rules may turn out to be irrelevant in a changing milieu. Such durability of routines can impede an organizations ability to adapt in the face of environmental volatility and changing institutional conditions. Thus, the persistence of durable routines and rules leads firms to make commitments to ways of doing things, which then serve to be the strategic or limiting factor when any change is called for. With respect to the second question as to why a specific era in which firms are born matters, Stinchcombe (1965) has argued that strategies are shaped by prevailing cultural and economic conditions. All economies involve a set of interdependent exchange relationships among the various firms and individuals that make up the system. Economic coordination is the process by which these transactions are managed among the various firms and individuals. The coordination process itself is, however, conducted within the prevailing ideology of the moment. In particular, Stinchcombe (1965, p. 154) states that organizations formed at one time typically have a different social structure from those formed at a different time. Such a social structure is going be influenced by the prevailing ideological conditions. Indeed, a body of evidence (Boeker, 1988; Kimberley, 1975; Meyer and Brown, 1977) establishes the importance of founding conditions on firms subsequent performance. Founding conditions define the institutional environment for firms (DiMaggio and Powell, 1983), and thereby the normative framework firms operate within. While conformity with norms increases a firms chances of being successful in its current operations (Meyer and Rowan, 1977), behavior according to the framework also increases the chances of firms being

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imprinted by the norms. Such imprinting has long-term consequences for firms performance. The routines that get engendered by operating during a particular epoch get codified and are internalized within the organization. Therefore, while the age and performance relationship is, no doubt, important, the study of the specific relationships between times of birth and firms subsequent growth abilities is equally, if not more, important in the disaggregated analysis of industrial performance. The limited evidence that exists supports the view that the age and growth relationship is negative. For the UK, Dunne and Hughes (1994) found that younger companies grew faster than older companies. Comparatively for the US, Evans (1987) also found that firms growth decreased with age. The analysis that we carry out, therefore, sheds light on an important theoretical issue in the industrial organization literature not only for a set of key Indian firms but for the literature generally. Additionally, the times of birth for the present studyprior to 1956, between 1956 and 1980, and after 1980help define firms age and these periods capture specific policy regimes that were in existence in India. Thus, our work also evaluates the impact of institutional factors on industrial performance.

3. Institutional concerns 3.1. The role of date of birth of firms The eras of birth for the firms, or the age categories that the firms thereby fall into, are the primary explanatory variables of firm-level growth in this empirical analysis. They are measured as the year for which the information is available for firms in this data set minus the year of incorporation as given in the data base. The year of incorporation can be: (a) either during Era 1, i.e., before 1956; (b) or during Era 2, i.e., between 1956 and 1980; (c) or during Era 3, i.e., after 1980. Specifically, each age category, or the era where the firms were incorporated, captures a time of birth in which the founding conditions for firms, which happened to be incorporated within that era, were unique. 3.2. Era 1the period prior to 1956 In the postindependence period, after 1947, the government has always had a hand on Indias industrial policy and development. Two mechanisms to implement industrial policy have been systems of industrial licensing and import licensing to foster import-substituting indigenous industrial development. A 1948 industrial policy resolution sought government control of industrialization, operationalized through the Industries (Development and Regulation) Act of 1951 (Government of India, 1951). It stated that the role of government was to create industrial wealth, rather than develop guidelines for devolving industrial assets into dispersed hands as a means of redistribution (Government of India, 1951). Thus, the role of the state as an important industrial entrepreneur was articulated and the role of the stateowned sector legitimized (Majumdar, 1998).

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If, however, private firms existed in certain industries such as steel where the state was to assume a dominant role, these firms had full freedom to undertake efficient production and expansion. The role of market processes was recognized with the role of government being an owner of firms. The policy ethos was the development of national capabilities; the states role was both primary, to step in where private capital was not forthcoming in actual quantity, and secondarily, also to correct regional lopsidedness in location. 3.3. Era 2the license raj period between 1956 and 1980 This is an era in which the command and control regime was firmly embedded. In 1956, a fundamental mindset shift took place among policy makers, and a second industrial policy resolution was enunciated. This resolution guided industrial policy making in India for almost a quarter of a century. The principle that the state was to be dominant in industrialization was to be maintained and extended. This resolution, however, went further and operationalized precisely the nature of public ownership. Private firms were likely to be occasionally authorized to produce items that were reserved for the state sector. The state sector, however, could enter at will into sectors where private firms were dominant players. The resolution also specifically mentioned that industrial undertakings ought to behave in consonance with the social and economic policy objectives of the state, howsoever defined. For instance, the Second Five-Year Plan document explicitly stated that, a comprehensive plan cannot be seen through as the basis of merely overall fiscal and monetary controls (Government of India, 1956, p. 38). Mohan and Aggarwal (1990) list how, in the 1960s and 1970s, control over resources by the government got operationalized into a number of steps that had to be gone through by an entrepreneur before production could commence. There were many major and comprehensive controls that had been negotiated by any industrial unit. These included, among others, procedures relating to acquiring: (1) a letter of intent to start an industrial firm; (2) capital goods imports clearances; (3) foreign technology collaboration clearances; (4) capital issue clearances; (5) raw materials import clearances; (6) essentiality clearances; (7) indigenous nonavailability of equipment and materials clearances; (8) monopolies clearances; (9) smallscale sector clearances; and (10) clearances for locating in nonmunicipal areas. The multiplicity of administrative hurdles not only reduced flexibility in launching projects, but inevitably tended to increase both project and production costs. In the 1960s, several review committees were also set up. An inquiry, chaired by Mr. T. Swaminathan, ICS, into procedural issues (Government of India, 1964) reported in 1964. An inquiry, chaired by Dr. R.K. Hazari, into the role of industrial policy as an instrument for development reported in 1967. The 1967 report (Government of India, 1967) concluded that whether industrial licensing served to channelize investment into desired directions appeared doubtful. There was very little follow-up of licensing to see that approved projects were completed on time. Also, in attempting to cover almost the whole range of large-scale industrial development licensing, the Industries (Development and Regulation) Act (Governemant of India, 1951) inevitably lost sight of the relative importance of different projects and products; i.e., whether critical to the economy or otherwise, all applications underwent similar processing.

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Concomitantly, during the 1960s, two key bodies were appointed to study the concentration of economic power in Indian industry, and evaluate whether the licensing regime had a role to play in fostering such concentration. These committees were the Monopolies Inquiry Commission (Government of India, 1965), chaired by the late Mr. Justice K.C. Dasgupta, ICS, and the Industrial Licensing Policy Inquiry Committee (ILPIC) (Government of India, 1969), chaired by the late Mr. S. Dutt, ICS. Mr. H.K. Paranjape, who was a member of the ILPIC, has paraphrased some key findings of the ILPIC, in respect of licensing, the system had failed practically on all counts. . . Licenses were issued in excess of capacity targets even in nonessential industries. . . Influential parties and large houses were permitted to preempt capacities (Paranjape, 1988, p. 2343). The industrial policy system permitted administrative excesses to take place, which in turn fostered rent seeking by private sector firms. This aspect of Indian industrial policy has been commented on, inter alia, by Bhagwati and Desai (1970). Bhagwati (1993, p. 49) has also written, Few outside India can appreciate in full measure the extent and nature of Indias controls until recently. The Indian planners and bureaucrats sought to regulate both domestic entry and export competition, to eliminate product diversification beyond what was licensed, to penalize unauthorized expansion of capacity, to allocate and prevent the reallocation of imported inputs, and indeed define and eliminate virtually all aspects of investment and production through a maze of Kafkaesque controls. This all-encompassing bureaucratic intrusiveness and omnipotence has no rationale in economic or social logic; it is therefore hard for anyone who is not a victim of it even to begin to understand what is means. Because there were a number of government agencies in the overall set-up to implement many parts of the system, not only did a nexus of industrialists and managers develop who wanted to see the system stay, but an equally large nexus of bureaucrats developed. Among the large number of agencies within the government, each sought to enforce the idiosyncratic aspects of control it possessed over industry, so that it, too, could enjoy bureaucratic rents. Each agency and its supporting interest group could have reforms measures stalled if they went against their specific interests. Marathe (1989, p. 100) has written, the system seemed to have acquired a momentum of its own; any attempts to reduce its procedural rigors or to make peripheral improvements were rejected by the system like an unwanted transplant. Over the years a formidable and pervasive vested interest had been built up in the continued operation of an elaborate system of regulation in which different agencies within the government and at different levels of responsibility had to be involved. The industrial policy regimes moved in the decades from the 1950s to the 1970s from being development-oriented to being regulation-oriented. While the role of the state as an investor had grown, the role of government as continuously influencing microlevel decisions also widened very considerably, with the state taking over almost all of the provision of capital to private industry and consequently being able to interfere at a microlevel in almost all corporate decisions. Implementation of policy was also extremely ad hoc and confusing to industry. For example, the late 1970s were characterized by the presence of contradictory policy-related actions. IBM and Coca Cola, as multinational corporations, were given marching orders out of India. At the same time, Siemens was welcomed into India as a major supplier for power

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generation equipment projects by the administration then in power. After the installation of the short-lived (19771979), coalition-based government of Morarji Desai, an initial attempt was made to liberalize industrial policy, but it miserably floundered. In the even more short-lived (19791980) Charan Singh regime, all economic policies were made subservient towards agricultural development so that income transfers could be made to the rich-farmer lobby. 3.4. Era 3the period after 1980 With the return of Mrs. Indira Gandhi to power after the elections in 1980, the aim of industrial policy as being one which would engender progress and development, through enhancement of the competitive process, began. The Seventh Five-Year Plan (19851990) (Government of India, 1985) document is unique among plan documents in spelling out the role of firm-level, microeconomic factors that would drive industrial progress, and in laying out the appropriate policy regimes that would foster the development of firm-level capabilities. Thus, the role of firms, particularly private firms, as key microeconomic was explicitly recognized. For example, product development was thought to be a significant area for industries. In their abilities to introduce new products, at competitive costs, industries would show their mettle. However, to do so needed the articulation of policy regimes that encouraged adoption of new foreign technologies and the establishment of plants with globally competitive scale parameters, as opposed to fragmentation of capacity among numerous firms. Empirical realities were being recognized, and evidence that a major change of heart was taking place is reflected in a statement in the seventh-plan document. It said that the approach of government bodies lays not in the extensive powers to control and regulate, but in their efforts to provide technical and administrative guidance to industries. The performance of these tasks will be informed less by legal or procedural codes but by better access to data and knowledge (Government of India, 1985, p. 7.42). Presumably, data and knowledge would enable the government to enhance the market process that would then generate competition. In the early 1980s, the ratification of surplus capacity as part of actual capacity also commenced, and the need to use existing capacity in place was well recognized by senior policy advisers. 1982 was declared as the Productivity Year, and in that year, a scheme of reendorsement of capacity was introduced. Until then, existing capacity in place could not be used to meet production quotas, even if market demand existed, if such capacity was in excess of authorized limits (Ahluwalia, 1985). Now, firms were allowed to use such excess capacities for productive purposes. Subsequently, the Seventh Five-Year Plan document recognized the important role of technological modernization and the upgrading of manufacturing capabilities in enhancing firm-level growth. 3.5. The impact of size The impact of age on firm-level growth is a topic that has been studied to some degree. An issue that has been studied in considerably more theoretical and empirical detail is the relationship between size and firms growth. The literature studying the relationship between

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size and firms growth is large.1 Nevertheless, the results are context-specific, depending on time and place, and no generalizations can be made. Certainly, for India, there is no evidence that has been generated to be used as a benchmark against which to test alternative theories of the relationship between size and growth, though prior work (Majumdar, 1998) does examine the linkage among age, size, and profitability of Indian firms. What will emerge as evidence for the Indian situation in this study is essentially of a primary nature. The key theoretical insight was provided by Gibrat (1931), who suggested that there should be no difference between the proportionate rates of growth between small and large firms. In other words, the ability of firms to grow is a random process and is independent of their absolute size. This implies that given the presence of a reversion to the mean effect, whereby larger firms will not grow faster than smaller firms, market or industry concentration is unlikely to occur. Whether or not Gibrats law of proportionate effect holds up in the Indian context has important implications for industrial market structure because the results will provide evidence as to whether or not a process of industrial concentration is currently at work in India. Given the significant conceptual and policy implications involved in the size and firm-level growth relationship, a control for size is included in the model.

4. Empirical analysis 4.1. Data The sample for which the empirical analysis is carried out consist of over 1000 firms, which are listed on the Bombay Stock Exchange. Initially, a random sample of over 3000 firms was extracted from the database, but missing variable problems finally brought the sample down to just over a thousand firms. This is a very large sample, anyway, compared to previous studies of the Indian industrial experience, which have been based on aggregate industrial statistics, and firm-level analyses of Indian industrial issues are rather rare in the literature. This sample has been used to address other relevant issues with respect to Indian industry (Chhibber and Majumdar, 1998, 1999; Majumdar, 1997). If firm-level analyses do exist for Indian industry, often the data used are over 10 years old and the generalizations drawn from such studies have no meaning in the currently changed Indian context. The source of the data is the Center for Monitoring the Indian Economy in Bombay, India. The data collected for each firm relate to a specific year between 1988 and 1994, with the reason for data collection ranging over a number of years being the availability of information
1 For example, see Adelman (1958), Cabral (1995), Chesher (1979), Dunne and Hughes (1994), Evans (1987), Geroski et al. (1997), Hall (1987), Hart (1962), Hart and Prais (1956), Hymer and Pashigian (1962), Ijiri and Simon (1964), Kumar (1985), Lucas (1978), Mansfield (1962), Nelson and Winter (1982), Samuels (1965), Samuels and Chesher (1972), Simon and Bonini (1958), Singh and Whittington (1975), Steindl (1965), and Sutton (1997).

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with respect to several key variables. The dependent variable in the regression model is measured as sales growth between the year for which the data are reported and the previous year. In the literature on firms growth, growth is normally measured as either growth in sales (Geroski et al., 1997), growth in employment (Evans, 1987), or growth in assets (Dunne and Hughes, 1994). Because of data availability limitations, we use the growth in sales as the relevant dependent variable. The empirical limitation is the absence of a panel data set. While this study involves data for over 1000 firms, it was not possible to acquire time series data for such a large crosssection of firms so as to create a panel. Because questions of growth are best addressed using a panel data set, the absence of such a panel is a keenly felt lacuna. Therefore, any generalizations that will be made from these results can only be based on data that are obtained for a limited period of time. These data are necessarily conditioned by the economic and environmental conditions that were prevalent in India for that period of time. Generalizations that are made are, therefore, subject to the data caveat. 4.2. Model estimation To test the impact of age on growth, two testing strategies are feasible. First, the approach is to introduce age as a continuous variable ranging between 0% and 100%. Under this approach, we can evaluate if there is a general relationship between age and growth. In India, as discussed earlier, there are three critical policy eras: prior to 1956, between 1956 and 1980, and after 1980. These lead to different age categories and potentially different growth outcomes. A general problem arises as a result of this categorization of birth. There cannot be a linear function that best represents the data; rather, the age and growth relationship is likely to be nonlinear. While linearity is attractive econometrically, given institutional considerations underlying the age and growth nexus, it is empirically institutionally and theoretically untenable. Therefore, a second testing strategy, in accordance with and compatible with prior work (Chhibber and Majumdar, 1998, 1999), has to be adopted. One way to determine the influence of these different age categories is to estimate the independent impact of the various categories of age through a series of separate estimations, or through a series of dummy variables, which is tantamount to estimating separate regressions for each ownership category (Maddala, 1977). These approaches, however, rule out any continuous movement from one age category to another (Greene, 1990), and also do not use all the information contained in the data for model estimation (Boyce, 1987). An alternative approach builds a relationship between the various categories through a series of linear segments, but forces these linear segments to meet at the endpoints of each age category. A class of models called spline regression models (Johnston, 1984; Poirier, 1976) captures this approach. Originally, spline regressions were used for time series regression models, where the dependent variable could have time-varying relationships with the independent variables (Boyce, 1987; Garber and Poirier, 1974). A spline model is equally appropriate for crosssectional analysis, especially when the key independent variable is continuous with very definite breaks or kinks, and there have been a number of uses of spline regression models in

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the literature with cross-sectional data to estimate important relationships (Geroski, 1981; Schwalbach, 1991). The general function to be estimated is: GROWTH a0 b0 AGE if DATE OF BIRTH < 1956; 1

GROWTH a1 b1 AGE

if DATE OF BIRTH  1956 and  1980;

GROWTH a2 b2 AGE

if DATE OF BIRTH > 1980;

where AGE is the observation year minus the date of incorporation and DATE OF BIRTH is the year of incorporation. The values for the various categories of ownership or the threshold levels of ownership are called knots. The knots are determined based on the discussion, with natural kinks in the data being provided by the government policy eras. As a result, we have two knots, at 1956 and at 1980. The function can be specified using dummy variables: d1 1 if AGE > t1 ; 4 5

if AGE > t2 ; d2 1 where t1 = 1956 and t2 = 1980. Combining all three equations yields: GROWTH b1 b2 AGE g1 d1 d1 d1 AGE g2 d2 d2 d2 AGE e: To ensure continuity, the segments should be joined at the knots, or: b1 b2 t1 b1 g1 b2 g1 t1 and b1 g1 b2 g1 t2 b1 g1 g2 b2 d1 d2 t2 :

These represent linear restrictions on the coefficients. Collecting terms in Eqs. (7) and (8), we obtain: g1 d1 t1 and g2 d2 t2 : 10 9

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Inserting Eqs. (9) and (10) in Eq. (6), we obtain: GROWTH b1 b2 AGE g1 d1 AGE t1 g2 d2 AGE t2 : 11 Introducing these constraints adjusts the intercepts so that slopes for the various categories join at the knots.

5. Results 5.1. What are other factors controlled for? The regression results are obtained after controlling for a number of other additional factors that may affect firms growth (Table 1). Both theoretical as well Indian context-related factors are considered. The factors controlled for are: (1) holding company effects, since belonging to a unique business group may allow a firm unique growth opportunities;
Table 1 Regression results Variable Constant AGE 1 AGE 2 AGE 3 SIZE GROUP INVENTORY CAPITAL INTENSITY FIXED ASSETS GROWTH LIQUIDITY EXPORT SALES EXPORT SALES GROWTH DEBT EQUITY EXCISE ADVERTISING MARKETING DIVERSITY IMPORTS FOREIGN GOVERNMENT DEBENTURES WAGES YEAR R2 F N Coefficient estimate 1282.435 0.677 2.776 21.764 23.318 37.114 0.441 1.215 0.004 10.193 0.284 0.105 1.071 0.737 4.936 0.370 3.496 76.897 0.089 0.555 0.018 0.018 28.081 .041 2.03 1054 S.E. 1580.365 0.813 1.426 5.229 10.764 21.168 0.947 0.679 0.031 37.504 0.621 0.153 3.102 1.110 7.669 3.789 18.387 66.888 0.591 0.596 0.070 0.054 32.443 t ratio 0.811 0.823 1.947 4.162 2.167 1.753 0.465 1.789 0.124 0.272 0.458 0.685 0.345 0.664 0.644 0.098 0.190 1.150 0.151 0.932 0.282 0.340 0.866

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(2) level of inventory holdings, since cash locked up in stocks of materials and goods can limit the availability of investible funds or signal unfavourable exogenous conditions; (3) capital intensity, since a high level of capital intensity can signify that relatively superior technological competencies may be available; (4) fixed assets growth, since growth in the overall assets to do business can lead to eventual sales growth; (5) liquidity, since funds availability can provide avenues for business expansion; (6) level of exports, since a predilection for overseas markets can reveal an entrepreneurial spirit; (7) exports growth, since success at penetrating overseas markets can have spillover impacts in domestic markets and for the firm as a whole; (8) leverage, since more funds available due to borrowings provide funding to exploit business opportunities; (9) level of indirect taxes borne, since a higher level can impede sales for the firm by making final consumer prices uncompetitive; (10) level of advertising expenditures, since promotion activities can help generate business; (11) level of marketing expenditures, again as market development tasks help generate business; (12) diversity of operations, as skills in conducting multibusiness activities can help generate greater sales for the firm as a whole; (13) level of imports, since the sourcing of parts from abroad can have a final higher quality impact and help generate overall sales; (14) level of foreign ownership, since foreign owners may have skills gleaned abroad that are useful for sales generation; (15) level of government ownership, since public sector ties might constrain market exploitation predilections; (16) debt usage pattern, since short-term debt levels faced by a firm can constrain long-term market development activities; (17) level of employment costs, as a high level of such costs may impact prices unfavourably enough to constrain sales generation; and (18) time effects as to whether the observation is for the period prior to the current liberalization that began in 1991 or later, since after 1991, a general release of entrepreneurial spirits was expected to impact on firms growth trajectories. 5.2. Results The coefficient value capturing the relationship between growth and birth of firms prior to 1956 is 0.677 (S.E. 0.813) and is not significant. The coefficient value capturing the relationship between growth and birth in the period between 1956 and 1980 is 2.776 (S.E. 1.426) and is significant at the 95% level. The coefficient value capturing the relationship between growth and birth prior in the period after 1980 is 21.764 (S.E. 5.229) and is significant at the 99% level. The coefficient of the size variable is 23.318 (S.E. 10.764) and is significant at the 95% level, indicating that a process of industrial

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concentration is not taking place in India. Rather, smaller firms are growing faster than the larger firms, and a process of fragmentation may well be taking place within Indian industry. The overall regression is significant at the 99% level. The findings are extremely important and interesting with respect to the behavior of Indian industry. Younger firms are more dynamic and grow more rapidly. Older firms are, however, not necessarily all laggards. Firms incorporated prior to 1956 are neither slow nor fast growers. However, it is the firms that were born in the license raj which are the slow growers in contemporary India. Founding conditions, therefore, do matter in significantly influencing firm-level growth, and for firms born in the period 19561980 in India, inertia and path dependencies may well constrain their ability to grow in the liberalized environment. Conversely, firms born after 1980, in the period when markets did begin to open up, are likely to do well. 5.3. Why these findings? It is useful to analyze the environmental conditions for firms born in the 19561980 period. During the license raj, there were little or no incentives for firms to enlarge production as a result of emergent competitive market pressures. Decisions on raw material inputs, foreign exchange, foreign technology purchases, types of collaborations to be undertaken, and the amount of domestic capital to be made available to any given industrial unit were also decision items that the state began to control, apart from controlling capacity dispensations themselves. Activities normally undertaken by firms, such as pricing and acquisition of raw materials, distribution of the final product, and how to allocate foreign exchange within a project, were all guided and heavily influenced by functionaries in the Ministry of Industrial Development. In the late 1950s, there was an abandonment of indicative planning for the industrial sector. Industries were given explicit directions as to the areas that they could enter, and the amount of investments possible in each sector. Particularly from the second plan onwards, there were increasing concerns with quantity controls and capacity management. Rather than provide macrolevel incentives to participants in product and factor markets that were becoming competitive, control over resources became the policy premise. Thereafter, the focus of strategic and operational decisions began to be taken away from the hands of industrial enterprises, with a likely impact on subsequent performance since explanations for poor performance could be laid at someone elses door. The regimes that existed in India in the 1960s and 1970s were more of the same 1950s approach (Ahluwalia, 1985). Coupled with a foreign exchange crisis arising after the 1962 China war, at the start of the third plan in 1961, there was realization that lack of monitoring allowed entrepreneurs to exploit the system. Also, the administrative burden of expanding industrial activity created such delays that criticisms of the system could no longer be avoided. However, in spite of conclusions that the industrial policy had failed and concentration of industry was taking place as a result of licensing, the status quo continued. The policy framework starting from the late 1960s is characterized as one of detailed administrative day-to-day direction (Jalan, 1991; Marathe, 1989). Controls over all facets of

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operations of firms became detailed and all pervasive, not just control over strategic issues as to whether particular industrial houses could enter certain sectors of industry. Because the license specified the maximum capacity of any undertaking, over time, these limits became the maximum actual production permissible. Production beyond these limits was deemed to be contravention of law, even though demand shortfalls might exist. Also, enterprises desiring to merely alter product mixes at their plants, even with existing capital equipment, had to seek approval. In the approval process, the judgment of the policy makers in the government prevailed in all areas, including areas such as the size, nature of the equipment, processes used, and physical plant location, over that of entrepreneurs. Similar controls were placed over foreign trade and investment. Bhagwati and Srinivasan (1975) have extensively analyzed the trade policy regime in India, the origins of which lie in two laws passed in the late 1940s and mid 1950s: the Imports and Exports (Control) Act of 1947 and the Import Trade Control Order of 1955. The Order of 1955 brought imports under the control of bureaucratic discretionary licensing, particularly those items for which a domestic angle and infant industry protection argument could be made (Ahluwalia, 1985). The scope of quantitative imports licensing via the Import Trade Control Order of 1955 increased, particularly in the 1960s, and rules were designed to allocate imports by specific product type and by product user category. Along with these quantitative import restrictions, there were price restrictions in many key industries such as coal, drugs, edible oils, fertilizer, steel, and sugar. There were also draconian restrictions on foreign investments with the promulgation of the Foreign Exchange Regulation Act (FERA) in 1973. In spite of lacunae, the system continued well into the 1970s and the regime easily transited into one in which administrative direction giving became the primary task of policy makers. While such administrative procedures were ostensibly democratically oriented, with a great deal of checks and balances, these checks showed the process of development and, more important, each administrative agency attempted to broker power by delaying the whole chain. In the 1970s, particularly after the 1975 emergency, various licensing policy liberalization measures were announced. But none of these measures had any impact because no measures were automatically implemented (Marathe, 1989). Every liberalization measure was treated as a new policy instrument, rather than as a negation of past policy. Firms had to go back to the policy makers to have these liberalization measures enforced. 5.4. The dead hand of bureaucracy has an impact Environmental forces define the norms of behavior that firms adopt, influence the nature of incentives firms face, and enhance or retard motivations for attaining high performance. Because every major strategic and operational decision was relegated to the bureaucracy, even if a license had been obtained, there were no factors over which entrepreneurs had control. Licensing allowed a finite market size to be made available to each entrepreneur who succeeded in acquiring a license. Hence, there were no incentives for survival in a competitive battleground. How the officially sanctioned market was to be served was also dictated to very closely by the authorities. Thus, there were no incentives left for industrialists to display any creative or

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craftsmanship skills, e.g., in product differentiation. Rather, expertise in managing the bureaucratic interface was critical. Since the government dictated all strategic and operational decisions, firms merely had to go through the motions of undertaking industrial activity, as Bhoothalingam (1993) has recounted. A mindset engendered by growing up and operating during the license raj, seemingly present in firms born during that period, can constrain the ability of such to operate successfully in the contemporary liberalized environment. This mindset is one of rent seeking and managing the bureaucracy rather than one oriented towards success in the market place. Such a mindset can hinder the exploitation of opportunities that are available in open market economies. Conversely, opening up of the market to foreign technology purchases, allowing plants with sufficient economic scale to be established, and encouraging the establishment of sunrise industries are characteristics of the policy environment from the early 1980s (Marathe, 1989). In import licensing, particularly with respect to capital goods, the realization that India had to learn skills and adapt new technology from abroad led to significant lessening of import restrictions. This occurred from the early 1980s, after a Committee on ImportsExports Policies and Procedures (headed by Dr. P.C. Alexander) (Government of India, 1978) had reported. The realization that the industry faced was that business practices as usual in managing the bureaucratic labyrinthine were less critical than the prowess needed in managing operations, production processes, marketing strategies, and the onslaught of potential competition. Changing incentives and norms, and the alteration of factors that earlier guaranteed industrial survival, mean that a growth and efficiency orientation carries a high premium. Thus, firms born after 1980, and which are relatively untainted by the operational competencies and routines acquired during the license raj, display a predilection for growth that is not displayed by the older firms. These firms have to acquire the skills needed to operate in competitive market places. It is these firms which will propel future Indian industrial progress forward.

6. Conclusion This paper has evaluated the relationship between firms age and growth for a very large cross-section of Indian firms, using contemporary data. Specifically, firms were classified as being born, or incorporated, in either the period prior to 1956, the period between 1956 and 1980 which was the license raj, and the period after 1980. A negative relationship was found for firms born during the license raj, suggesting that the command and control regime on which the license raj was based has had a deleterious influence on the ability of firms to adapt themselves to the contemporary liberalized industrial environment. Comparatively, firms born after 1980 display a positive relationship between age and growth, implying that the spirit of entrepreneurship is very much alive in India. Industrial growth is a key component of overall economic growth, and the new generation of firms can help India make overall economic progress. The recent example of firms in the information

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technology sector provided hope that Indias industrial prowess can be substantial, and that all is not lost for Indian industry. What implications do these results then have for the future evolution of Indian industry? Clearly, in the postliberalization era, a shakeout of industrial structure is likely as the older license raj firms cannot keep up with the pace of change and eventually atrophy away. What is likely to be noticed, therefore, in the coming years is that the proportion of real sector output contributed by the newer, and more agile, firms is likely to substantially increase. In regard to their abilities to manage in a postliberalized environment, many license raj firms are at the forefront of attempting to secure protection from foreign as well as domestic competition. A number of these license raj firms, in conjunction with industry associations such as the Confederation of Indian Industry, have been arguing for the control of entry into several sectors of industry. This is, prima facie, one indication that the firms born in the license raj are finding it difficult to operate in the new emerging competitive environment. 6.1. The issue of size The relationship between size and growth is negative. This suggests that a process of industrial concentration is currently not in progress in India. Gibrats law is not found to be valid in the Indian context. The results indicate that large firms, instead, grow at a proportionately lower rate than smaller firms do. As time evolves, it may well be that the absolute value of sales growth realized by smaller, say third or fourth quartile, firms equals or exceeds the value of sales growth realized by the larger firms. These results cannot as yet show whether fragmentation of the Indian industrial structure is occurring. But they do, prima facie, indicate that concentration is not taking place. This finding has considerable implications for the evolution of industrial market structure in India and the future contestability of the India market. As the smaller firms grow larger, they can bring sizeable pressure to bear on the existing larger firms. These larger firms may then have to adopt strategies that are consistent with a loss of market dominance that will occur. In such a scenario, innovation and technological progress are going to be enhanced and this can only be of benefit to the welfare of the consumer in India.

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