Empowering women entrepreneurs can have a “multiplier effect” on India’s economy

Over the past three decades, India has become one of the world’s fastest-growing and rapidly urbanizing economies. While the country’s GDP has tripled over this period, its female labor force participation (FLFP) rate – an indicator typically associated with economic growth – has remained low, showing the persistence of gender inequality.   

Could bolstering female entrepreneurship bring more women into India’s workforce? In a new study published in Econometrica, EGC affiliate Pinelopi (Penny) Koujianou Goldberg and her coauthor Gaurav Chiplunkar, a Yale graduate, evaluate the barriers to entrepreneurship faced by Indian women and analyze how removing them could affect the economy. They find that boosting female entrepreneurs would not only benefit female business owners, but also female workers and India’s economy as a whole.  

In recent decades, India has made strides in education and health for both men and women. For example, gender parity has been achieved in primary school enrollment and female enrollment in tertiary education increased fourfold between 2000 and 2023, matching male enrollment rates of around 33%.  Additionally, the proportion of women reporting that they participate in decisions related to their own health care and household purchases has risen considerably. Despite these advancements, FLFP has paradoxically declined between 2000 and 2020.   

A possibly connected factor is female entrepreneurship, which remains strikingly low in India. Excluding self-employed individuals, female-owned firms account for only 3% of all businesses in the country. This phenomenon is not unique to India; globally, only one-third of businesses have at least one woman among their principal owners. Yet there has been relatively little economic research on the drivers and constraints related to female entrepreneurship.  

New research by Penny Goldberg, the Elihu Professor of Economics and Global Affairs, and Gaurav Chiplunkar, a Yale PhD and Assistant Professor at the Darden School of Business, University of Virginia, seeks to address this gap in the literature. 

“People talk a lot about female entrepreneurship from a social norms perspective,” Chiplunkar said in an EGC interview. “But what do we really know about it from a macroeconomic perspective?”  

In their study, Goldberg and Chiplunkar developed an economic framework to quantify the barriers faced by female entrepreneurs in India, and then ran a series of counterfactuals (or “what-if scenarios”) to estimate the potential economic impact from eliminating each barrier.  

Most policies supporting female entrepreneurship, in India and globally, focus on encouraging the creation of new businesses. However, Goldberg and Chiplunkar found that policies to support the growth of women-owned businesses can be far more effective. This is because after starting their businesses, female entrepreneurs often face even bigger challenges than their male counterparts in sustaining or scaling their ventures.  

“If you have no room to grow, there is no reason to enter,” Goldberg said.  

Policies addressing barriers to entry can thus be more effective when complemented by measures aimed at lowering barriers to business expansion. This dual approach would benefit female entrepreneurs, female workers, and the broader Indian economy by increasing the proportion of women entrepreneurs and boosting real wages and profits for women. 

The growth of female entrepreneurship can also generate a spillover effect that boosts the growth of FLFP: women-owned firms employ more women. The researchers found that this pattern is not driven by sectoral sorting (for instance, by women self-selecting into sectors such as textiles both as entrepreneurs and as workers); the pattern is evident even at a highly disaggregated level – meaning, within narrowly defined product categories. When more women become entrepreneurs, more women also enter the labor force and become wage-earners, since female entrepreneurs employ more female workers.  

By boosting demand as well as supply for female labor in this way, female entrepreneurship also addresses the risk that women’s wages decline as FLFP increases, the researchers found. Standard economic theory suggests that increasing labor supply can depress workers’ wages unless there is a corresponding rise in labor demand; therefore, when traditional policies targeting FLFP are successful, they run the risk of also depressing women’s real wages.  

Goldberg and Chiplunkar found that increasing female entrepreneurship can balance these tensions, only marginally decreasing women’s real wages with the potential for long-term wage gains as the economy grows. 

“Female entrepreneurship provides a way for increasing demand for women workers. This encourages more women to enter the labor force without depressing the real wage,” Goldberg explained.  

One of the researchers’ most compelling findings is that, on average, successful female-owned firms are more productive than their male-owned counterparts – which has significant policy implications.  

In the Indian economy, formality is a good proxy for firm productivity. Only 1% of Indian firms are in the formal sector, but the average formal-sector firm is much larger and more productive than the average informal-sector firm. Interestingly, while female-owned informal firms are 7% smaller than male-owned informal firms, female-owned formal firms are substantially larger than their male-owned counterparts.  By this metric, within the formal sector, women-owned firms appear to be more successful.  

“The women who actually make it to the top have to be very good. In our estimates, this shows as a difference between the marginal productivity of the male and female entrant, at baseline” Goldberg said. 

As noted, however, the vast majority of large Indian firms are owned by men. Given the country’s gender-based barriers, it is possible that some low-productivity male-owned businesses are able to operate in the economy only because they do not face competition from more productive female-owned firms.  

The researchers showed (via the simulation of “what-if” scenarios) that if such barriers were removed, women-owned firms would be allowed to grow while some low-productivity male entrepreneurs would be driven out of business. At an economy-wide level, such trends would reduce the misallocation of talent and resources in India. This improvement in allocation would, in turn, increase aggregate productivity and real income for India’s entire economy, across industries and firms.  

In other words, boosting women’s entrepreneurship and FLFP goes well beyond the goal of addressing gender inequalities; it can contribute to India’s broader economic development. 

“Addressing gender barriers is a human rights issue,” Goldberg said. “But even if policymakers are motivated by self-interest and nothing else – this is still a good policy.”  

Research Summary by Iris Zhao