Comparative study of dwarf and infant firms’ performance in Indian SMEs

Small and medium-sized enterprises (SMEs) play a vital role in economic development, employment generation, and structural transformation in developing economies. This study examines the performance differences between infant and dwarf firms in India using firm-level data from the World Bank Enterprise Survey (2022). Firms are classified based on age and employment size to capture variations in growth potential and structural constraints. The analysis focuses on four key performance indicators, such as value added, labour productivity, sales growth, and employment growth, while incorporating financial variables (savings accounts, overdraft facilities, and lines of credit) and investment climate factors (power shortages, informal competition, management time, and annual cost of security). The study employs an Ordinary Least Squares (OLS) regression with robust standard errors to address heteroscedasticity. The findings reveal that access to external finance, such as overdraft facilities, positively influences firm performance, whereas reliance on internal finance through savings accounts has a negative effect on it. Investment climate constraints, including informal competition and regulatory burdens reflected in management time, significantly hinder firm outcomes. The impact of the annual cost of security is mixed across performance indicators. Overall, the results highlight structural differences between infant and dwarf firms and emphasize the importance of improving access to external finance and reducing institutional inefficiencies. Policy measures aimed at easing financial constraints and enhancing the business environment support firm growth, productivity, and broader economic development.