Where Do India’s Small Businesses Thrive? The Geography of Entrepreneurship

The Big Question What makes some Indian states hotbeds for new small businesses while others lag behind? This groundbreaking study examines how regional factors shaped the birth of new SMEs across India from 1980-2007, offering crucial insights for policymakers looking to spark entrepreneurship in their states.

Why This Matters

• SMEs are critical economic engines, contributing:
  • 31.8% of India’s gross value added
  • 48.1% of exports
  • Over 111 million jobs
• Understanding why they flourish in some places helps spread opportunity more evenly

The Research Journey Data and Approach

• Analyzed detailed data on SME formation across Indian states over 27 years
• Examined multiple factors: market size, skills, infrastructure, technology, finance access
• Used sophisticated statistical methods to identify what truly drives business creation

Key Findings: A Tale of Three Indias

The Leaders

• South India: Became an entrepreneurial powerhouse, with states like Tamil Nadu leading
• West India: Strong showing from states like Gujarat with deep business cultures
• North India: Mixed performance but some bright spots like UP emerging

The Regional Divide

• Just 5 states accounted for 64% of new SMEs by early 2000s:
  • Tamil Nadu
  • Uttar Pradesh
  • Gujarat
  • Karnataka
  • Kerala

What Makes a State SME-Friendly?

Positive Drivers

1. Large local markets with growing demand
2. Strong skilled workforce through higher education
3. Good transportation networks, especially roads
4. Technology-intensive manufacturing base
5. Established entrepreneurial culture

Surprising Findings

• Higher state incomes don’t necessarily mean more startups
• Bank credit showed negative correlation with SME formation
• Urban concentration wasn’t as important as expected
• Foreign investment had little impact

Practical Takeaways

For Policymakers

1. Focus on skill development through education expansion
2. Invest in roads and railways
3. Promote technology-intensive manufacturing
4. Address systemic bias in institutional credit access
5. Foster entrepreneurial culture through targeted programs

For Entrepreneurs

1. Consider states’ business environment holistically
2. Look beyond just market size and income levels
3. Value access to skilled workers and infrastructure
4. Don’t overlook opportunities in less obvious locations

Looking Forward
The study suggests a path forward for more balanced regional development – not by trying to replicate Silicon Valley everywhere, but by understanding and building on each region’s unique strengths while addressing critical gaps in skills, infrastructure and institutional support.

Academic Abstract:

The development of 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 entry of new SMEs across Indian states and sectors from 1980-2007. It expands the literature on formation of firms from the sub-national perspective, empirically uncovering regional factors that significantly determine the formation of new firms. Findings suggest that new SME formation in India is characterized by a concentrated regional pattern during the study period, with a few regions accounting for disproportionate share of the number of new SMEs formed. Also, Indian sub-national entities exhibited considerable disparity in the entry rate of new SMEs. Regional factors like local market size, availability of skills, technological specialization of manufacturing sector, land transportation networks, and entrepreneurial culture tend to play positive role in the formation rate of SMEs in Indian states.

Learn More:

Full citation: Pradhan, Jaya Prakash and T. Husain (2021), ‘Empirical Drivers of SME Formation in Indian States’, Orissa Economic Journal, 53(1), pp. 85-124, Publisher: Odisha Economics Association.

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