Small firms are fashionable in India; as elsewhere. They have been encouraged and subsidised simply because they are small not because some of them are innovative and hence potential. While there is little scope for Italian-style flexible specialisation in India for the time being, it is a better and more realistic aim than a separate 'small-scale sector' INDIA has had a policy of encouraging 'small-scale industries, and discriminating against large firms. Small firms are supposed to tap reserves of entrepreneurial talent; to make for dispersed ownership, and also for geographical dispersal of industry and population in small towns; to make cheaper goods the masses can afford; and, to reduce social conflict because of close personal relations between employers and workers. Above all, it is claimed that small firms are more labour-intensive, more likely to use appropriate technologies, so they create more employment than large ones. But all these assumptions are doubtful: small firms are not always more labour-intensive than large ones, labour relations are no better and often worse; and so on [see Holmstrom 1984].
