This paper highlights the small firms’ crucial and seminal role in India; it arises out of both the late industrialization and the particular historical experience of industrialization that has contributed to the evolution of the industrial structure. Analyzing the Indian reality in the context of the experiences of Japan and East Asia and the insights of Dennis Anderson (1982), the paper argues that existing macroeconomic, trade, and exchange-rate policies do not favor rapid growth and transformation of small firms, even as they do not favor manufacturing. This is worrying because today Indian manufacturing has to compete with many countries, but notably the dynamic East Asian. Small firms’ comparative advantages lie in manufacturing especially in items that involve a greater share of value added from labor particularly semiskilled and skilled labor and in the Indian context even unskilled labor. Successful late industrialization episodes show the crucial role of labor-intensive manufacturing in transforming the economy, especially in exports in the early phase of the transformation. Since small firms have a comparative advantage in labor-intensive manufacturing, amplified by the schism in the labor market, voluminous exports that exploit the country’s labor cost advantage are not possible without the small firms dominant and productive role. This also gives criticality to the key complementary role of larger firms that give out subcontracts, aggregate, and trade in small-firm products. Hence, in a micro-action sense promotion of such trading houses and integrators as also freeing small firms to perform this vital role may be crucial. The key role of trading firms is amply observed in the case of East Asia, especially Japan. 

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