Formal finance has a greater positive impact on informal firm productivity than informal credit, highlighting the need for financial inclusion and literacy.
Authors
Lokesh Posti, Assistant Professor, Jindal Global Business School, O.P. Jindal Global University, Sonipat, Haryana, India
Mamta Kholiya, Uttarakhand, Haldwani, India
Akhilesh Kumar Posti, Rani Durgavati Vishwavidyalaya, Jabalpur, India
Summary
The study investigates the differential impact of various sources of finance on informal firm performance. In the informal sector, where access to finance is limited, we investigate how productivity varies with different sources of finance. Given the data limitations, a pseudo-panel data design was used by combining the three only available, independent cross-sectional surveys conducted by the National Sample Survey Office between 1999 and 2000 and 2015–16. Using formal and informal credit as two different sources of finance and total factor productivity (TFP) as the primary measure of firm performance, we find a positive relationship among them across all major industries; however, the impact of formal finance was higher than informal credit. Our results stand robust against alternative performance measures. Additionally, to address endogeneity concerns, dynamic panel data analysis was adopted. Obtained findings convey essential policy implications for intensification of financial inclusion and financial literacy.
Published in: Empirica
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