| Type | Journal article (empirical study) |
| Title | “Empirical Drivers of SME Formation in Indian States” |
| Authors | Jaya Prakash Pradhan · Tareef Husain |
| Published | 2021 · Odisha Economic Journal, 53(1), pp. 85–124 · Odisha Economics Association |
| Data | New SME formation across Indian states and sectors · 1980–2007 |
| Read | Read the paper (PDF) |
This is a plain-language summary of “Empirical Drivers of SME Formation in Indian States,” a paper I co-authored with Tareef Husain (Odisha Economic Journal, 2021).
In short:
- New small businesses don’t spread evenly across India — just five states produced nearly two-thirds of them by the early 2000s.
- What drives a state’s SME formation is its markets, skills, roads, technology-intensive industry, and entrepreneurial culture.
- Several intuitive factors barely mattered — or worked in reverse: higher income, bank credit, urban density, and foreign investment.
Why this matters
Small and medium enterprises are among India’s most important economic engines — they account for roughly 31.8% of gross value added, 48.1% of exports, and over 111 million jobs. So where new ones are born, and why they cluster where they do, is not an academic curiosity: it shapes how widely economic opportunity spreads across the country.
Where the businesses cluster
The first finding is stark. New SME formation across India over 1980–2007 was heavily concentrated: a handful of states produced a disproportionate share of all new firms, while others lagged far behind.
It’s a tale of three Indias. The South became the entrepreneurial powerhouse, led by Tamil Nadu and with strong showings from Karnataka and Kerala. The West brought deep business cultures, Gujarat foremost. The North was more mixed, though states like Uttar Pradesh stood out. The common thread is that entrepreneurship has a geography — and it is an uneven one.
What makes a state SME-friendly?
So what separates the hotbeds from the laggards? Using statistical analysis of state-level data, the study identifies the regional factors that genuinely move the needle — and, just as usefully, the ones that don’t.
The drivers form a coherent story: firms are born where there is demand (large, growing local markets), talent (a skilled workforce built through higher education), connectivity (good roads and transport), a technologically capable manufacturing base, and an existing culture of enterprise to build on.
The surprises are just as instructive. Higher state income didn’t reliably translate into more startups. Bank credit showed a negative association with SME formation — a striking hint that formal finance wasn’t reaching new small firms where they were forming. Urban concentration mattered less than the agglomeration literature would predict, and foreign investment had little effect on home-grown SME creation. Together they caution against assuming that wealth, big cities, or foreign capital will automatically seed entrepreneurship.
What it means
| For policymakers | For entrepreneurs |
|---|---|
| Expand skills through education | Weigh the whole business environment, not just market size |
| Invest in roads and railways | Look beyond income levels |
| Promote technology-intensive manufacturing | Value access to skilled workers and infrastructure |
| Fix the bias in institutional credit access | Don’t overlook less obvious locations |
| Foster entrepreneurial culture through targeted programmes |
The wider lesson is that balanced regional development won’t come from trying to replicate Silicon Valley everywhere. It comes from understanding each region’s particular strengths and building on them — while closing the real gaps in skills, infrastructure, and institutional support.
Read the academic abstract
The development of the small and medium enterprises (SMEs) sector is a policy priority, as these enterprises play a critical role in the growth and development process of any economy. The present study explores the regional dimensions of the entry of new SMEs across Indian states and sectors from 1980 to 2007. It expands the literature on the formation of firms from a sub-national perspective, empirically uncovering the regional factors that significantly determine the formation of new firms. Findings suggest that new SME formation in India is characterised by a concentrated regional pattern during the study period, with a few regions accounting for a disproportionate share of the number of new SMEs formed. Indian sub-national entities also exhibited considerable disparity in the entry rate of new SMEs. Regional factors like local market size, availability of skills, technological specialisation of the manufacturing sector, land-transportation networks, and entrepreneurial culture tend to play a positive role in the SME formation rate across Indian states.Cite this article
Pradhan, J. P., & Husain, T. (2021). Empirical drivers of SME formation in Indian states. Odisha Economic Journal, 53(1), 85–124. Odisha Economics Association.
Related on this site
- The co-author’s profile: Dr. Tareef Husain — Charting New Paths in Regional Economics
