Geographic Impact of Indian Economy

ECONOMIC GEOGRAPHY OF INDUSTRY LOCATION

IN INDIA

Somik Lall and Sanjoy Chakravorty

____________________________________

Paper prepared for the UNU/WIDER Project Conference on

Spatial Inequality in Asia

United Nations University Centre, Tokyo, 28-29 March 2003

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Economic Geography of Industry Location in India

Somik Lall

Development Research Group

The World Bank

Washington, DC, USA

slall1@worldbank.org

and

Sanjoy Chakravorty

Department of Geography and Urban Studies

Temple University

Philadelphia, PA, USA

sanjoy@temple.edu

D R A F T

(Please do not cite without permission)

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Economic Geography of Industry Location in India

Where do different industries locate? What factors influence the spatial

distribution of economic activity within countries? Finding answers to these questions is

important for understanding the development potential of sub national regions. This is

particularly important for developing countries as they have relatively lower levels of

overall investment and economic activity is concentrated in one or a few growth centers.

Thus, regions that do not attract dynamic industries are not only characterized by low

productivity, but also by lower relative incomes and standards of living. These questions

on industry location and their implications are not new. Examining the locational aspects

of economic activity has long been of interest to geographers, planners, and regional

scientists (Weber, 1909; LÐ"¶sch, 1940; Hotelling, 1929; Greenhut and Greenhut, 1975,

Isard 1956). However, analytic difficulties in modeling increasing returns to scale

marginalized the analysis of geographic aspects in mainstream economic analysis

(Krugman 1991). Recent research on externalities, increasing returns to scale, and

imperfect spatial competition (Dixit and Stiglitz 1977; Fujita, et al. 1999; Krugman

1991) has led to renewed interest in analyzing the spatial organization of economic

activity. This is especially true in case of geographic concentration or clustering.

Models in the Ð''New Economic Geography' literature (see review in Fujita,

Krugman, and Venables, 1999) allow us to move from the question Ð''Where will

manufacturing concentrate (if it does)?' to the question Ð''What manufacturing will

concentrate where?' These insightful theoretical models provide, for the most part,

renewed analytical support for the "cumulative causation" arguments made in earlier

decades on the core-periphery relationship, on agglomeration economies, and on

industrial clustering. In this context, we are interested in finding empirical answers to

these (very old) questions, and to go beyond, to ask, "What manufacturing will locate

where and why"?

Industry location and concentration decisions are driven by two fundamental

considerations: a set of "pure" location or "economic geography" criteria, including well

recognized elements such as urbanization and localization economies, market access,

infrastructure availability, etc. The other is a set of "practical" or "political economy"

criteria, where the state is a key player in industrial ownership and production, and uses

location considerations that are different from the private sector. The private sector

responds to the very strong influence of state regulations, and the result is an industrial

geography that is shaped by factors of economic geography and political economy.

To understand the process of industrial location and concentration, it is important

to first analyze the location decisions of firms in particular industries. The location

decision of the individual firm may be influenced by several factors. These include (a)

history Ð'- being Ð''accidental', (b) availability of infrastructure, proximity to buyers and

suppliers, and local amenities Ð'- Ð''economic geography', and (c) local wages, taxes,

subsidies, and incentives Ð'- Ð''political economy'. In this paper, we undertake two

exercises: First, we develop and estimate an economic model to assess the impacts of

region specific characteristics on location choices of firms in carefully defined industries.

Second, we study the industrial clustering process within metropolitan areas.

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For the empirical application in the first part, we use micro level establishment

data for Indian industry to examine the