Financial Constraints and Total Factor Productivity Evidence from Indian Manufacturing Companies

This paper tries to investigate the role of financial constraints on determination total factor productivity of the manufacturing firms operating in India. This study uses 652 firm-level data over a period of 1998–99 to 2012–13. For the measurement of total factor productivity, Levisohn-Petrin method has been employed, and Generalized Method of Moments (GMM) technique has been used to establish the relationship between financial constraints and total factor productivity. The results reveal that total factor productivity of the firms has increased during the period 1997–98 to 2000–01, but it has become stagnant after that. From the econometric analysis we find that the financial constraint proxies like availability of internal cash flow, financial leverage and liquidity play the significant role in determining total factor productivity of the all firms. The results show that internal cash flow and liquidity have the positive and leverage has the negative impact on the total factor productivity during this period of study. The results are robust across the sub industries within the manufacturing industry, and different types of firms categorized on the basis of their cash flow and liquidity. These findings have implications for the policy makers to formulate appropriate policies for development of financial markets through which the firms can raise the financial capital in a cost effective manner.