Abstract: We examine financing channels and governance mechanisms among various types of firms in India, and compare them to those from other countries studied in existing literature. Despite its English common-law origin, strong legal protection provided by the law and a democratic government, corruption within India’s legal system and government significantly weakens investor protection in practice. External financing of firms has been dominated by non-market sources of financing, while the characteristics of listed firms are similar to those from countries with weak investor protection. Our evidence, including results based on a survey of private firms in the Small Scale Industries (SSI) sector, shows that alternative financing channels provides the most important source of funds. We also find that informal governance mechanisms, such as those based on reputation, trust and relationships, are more important than formal mechanisms (e.g., courts) in resolving disputes, overcoming corruption and supporting growth.
Keywords: India, law and finance, institutions, informal mechanisms, SSI sector.
JEL classifications : O5; K0; G0