Recent ongoing literature focuses that technological development and globalization are
transforming the internal organization of the firm and present study seeks to address this issue as
an impact of trade reform in developing economy. It is interesting that a large part of producing
activities in developing economies like India is undertaken by informal producers, mostly those
who are vertically related to formal producers. Moreover, during the post-reform period in India
vertical separation has increased by buyers giving more subcontracts to informal producers
through mutually contractual relationships. How informal producers survive and what the
economics of informal contracts are, is still under-researched. An upcoming trend of tying up of
powerful downstream producers to small upstream intermediate producers is observed with
informal assistance to upstream innovation efforts during the post-reform period. Trade reform
policy in India enhances vertical separation in order to reduce the bureaucratic costs inside an
integrated firm. If a powerful buyer transfers the burden of price cuts to the upstream firm, this
invariably squeezes his own profit as a feedback, because of reduction of upstream innovation
effort. When a power buyer assists upstream innovation, it not only helps upstream innovation
effort, but also benefits surpluses for both supplier and buyer.