SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: There has been a revival of interest in small industries and their linkages with a nation's institutional arrangements, among both academicians and policy makers. Extending the definition of institutions to include formal and informal rules, this paper attempts to identify these linkages using the technique of transaction costs. Applying this to the economic environment of small firms in Taiwan and India it is found that transaction costs have been lower among Taiwanese small firms when compared to their Indian counterparts owing to certain institutional factors which have shaped its developmental history, the most important ones being the indirect intervention of the government, strong vertical linkages and a high level of human capital endowment. It is argued that the protectionist policy and other institutional factors in India perpetuated an institutional rigidity that worked to raise transaction costs for the small firm.

Keywords: Small industries; institutions; transaction costs; Taiwan; India

JEL-codes: D8; E6; L1; O14; O53; O57

84 pages, November 1995

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