Regulatory and Union Evasion via Plant Splitting
Labor laws and regulatory enforcement in developing economies target individual plant thresholds rather than total firm size, creating structural incentives for expanding firms to open multiple small facilities instead of scaling existing plants.
Picture this
Think of a restaurant owner who wants to double seating capacity but knows that any single dining room with more than 50 chairs triggers strict state health inspections and mandatory union oversight. Instead of expanding the original restaurant, the owner opens a second small restaurant across town with 45 chairs, duplicating basic overhead to remain below legal enforcement thresholds.
What the evidence says
Treatment firms opened 0.259 more plants over 3+ years compared to the industry average of 0.120 plants, while showing no statistically significant change in employee count per plant (-1.28, SE 6.19) or loom count per plant (2.38, SE 3.24).
- Who
- 113 large woven cotton fabric manufacturing firms (including 17 project firms and 96 nonproject industry firms) near Mumbai, India.
- How
- Cross-sectional survey and panel regression measuring firm growth by plant count, loom count per plant, and employee count per plant under India's Factories Act (1947) and Industrial Disputes Act (1947).
What to do
Structure enterprise expansion plans around building separate modular production facilities when operating in jurisdictions where labor laws and unionization rules apply on a per-facility basis.
From the source
"Expansion occurred through increasing the number of plants (as opposed to expanding current plants) as this apparently reduced the risk of unionization and regulatory problems."
541 Management in India QJE.pdf