The Hidden Hand and the License Raj : An Evaluation of the Relationship between Age and the Growth of Firms in India

This study considers the impact of macro-institutional environments, and 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. 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 define and denote specific policy regimes affecting Indian industry. 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. Conversely, for firms incorporated after 1980 when market forces began to be encouraged, and the "hidden hand" started becoming visible in India, the age and growth relationship is positive. The evidence suggests that entrepreneurial behavior is an 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 borne out by the analysis. The "hidden hand" is alive and well in India! Additionally, the relationship between size and the growth of Indian firms is 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 large firms in Indian industry. This has important implications for the future competitiveness of Indian industry