In the recent past, subcontracting, ancillarization and out-sourcing are emerging as important organizational outfits that link small and micro enterprises with large industrial units, to the benefit of both. It is also regarded as an important source of efficiency and competitiveness for these industries, most markedly for the small enterprises. Based on a mix of primary and secondary data, the present paperexamines incidence, sectoral pattern, characteristics features of subcontracting firms, the benefits and problems associated with subcontracting and its role as an instrument for technological up-gradation in small manufacturing enterprises. These issues have been analyzed both by type and location of enterprises. The paper finds that while the overall incidence of subcontracting is of very low order, it varies significantly among different industry groups. Delayed payment by the parent firms is reported to be the most important problem of subcontracting. Technological support from the parent firms have also been reported by many small enterprises. Further, in terms of adoption of new forms of technological changes, the units working under subcontracting have shown better rate of adoption as compared units those are not working under subcontracting. The paper concludes with some areas of policy intervention such as providing financial and technological support to small enterprises, enforcement of appropriate legislation to minimize the problem of undue and delayed payments by the parent firms and revamp subcontracting exchange programme and so on for successful and effective operation of subcontracting.