Asymmetric information, industrial policy, and corporate investment in India

Using a panel of Indian manufacturing firms, the authors estimate an augmen ted q model of investment and find that internal funds are less important f or small firms than for large firms. This result is consistent with the exi stence of small-firm promotional programmes in India. When the sample of la rge firms is divided based on the likelihood of overcoming capital-market i mperfections, internal funds are unimportant for very large, well-known fir ms. These results suggest that once the government's promotion of small fir ms is taken into account the pattern of reliance on internal funds predicte d by asymmetric information arguments may exist in India.