In the context of Indian industry, this paper argues that in the presence of capital market imperfections and sub-optimal contractual arrangements, small firms face higher transaction or selling costs in the domestic market. One of the strategic responses by small firms towards overcoming the mobility barriers imposed by high transaction costs in the domestic market is to break into the competitive world market. Small firms that could realize a critical level of production efficiency and possible information externalities that arise through inter-firm linkages might be the ones that could succeed in exports. The empirical observations derived from the analysis of fire level survey data provide reasonable support to the main arguments.