Abstract
The manufacturing sector in India is characterized by a large number of MSMEs (Micro, Small, and Medium Enterprises), which are particularly vulnerable when it comes to financing their investments. This study investigates the impact of credit constraints on the investment decisions of MSME and exporting firms within the Indian manufacturing sector. It analyses data from 1,412 manufacturing firms listed on the Bombay Stock Exchange (BSE) from 1990 to 2022. To examine the role of credit constraints on investment, the study employs the Investment Cash Flow Sensitivity (ICFS) approach, utilizing a two-step system GMM method. The study finds that the ICFS of MSMEs is negative and statistically significant, while the ICFS of exporting firms is positive but not statistically significant. Additionally, the ICFS of MSME exporters is negative but not significant, whereas it is negative and significant for MSME non-exporters. Overall, the results suggest that Indian exporters, along with MSME exporters, can secure external financing for their investments. However, MSMEs and MSME non-exporters face significant credit constraints, which hinder their investment capabilities. While numerous studies on Indian firms suggest a positive ICFS due to credit constraints, this study reveals that ICFS is non-monotonic in relation to the degree of credit constraint among Indian MSMEs. This finding shed new light on the negative ICFS observed in Indian MSMEs. The findings have important policy implications. The government needs to enhance investment expenditure among MSMEs by providing better access to credit, which could, in turn, improve the export performance of the Indian manufacturing sector.
Keywords: Credit Constraint, Export, Investment Cash Flow Sensitivity (ICFS), Two-Steps System GMM.