Dynamic Externalities and Regional Manufacturing Growth: Evidence from India

Open access


Using Annual Survey of Industries (ASI) dataset for 11 two-digit manufacturing industries and 20 states, this paper tests the relationship between dynamic agglomeration externalities and regional manufacturing growth for India. Three types of dynamic externalities have been proposed in the literature for explaining this relationship – Marshall-Arrow-Romer (MAR) specialization externalities, Jacobs’s diversity externalities, and Porter’s competition externalities. This paper examines the effect of these dynamic externalities on regional manufacturing employment and total factor productivity (TFP) growth for selected Indian industries between 2001-02 and 2011-12. The panel data model results show that dynamic externalities are important in influencing employment growth but they do not seem to have an impact on the growth of manufacturing productivity. Further, the results show that specialization externalities positively affect the employment growth of capital-intensive industries whereas diversity externalities favourably affect the employment growth in labour-intensive industries. Our results suggest that the importance of dynamic externalities should not be examined by pooling all industries. The results also highlight the importance of infrastructural investments for boosting the growth of manufacturing employment and productivity.

Acemoglu, D. (2008). Introduction to Modern Economic Growth. Princeton, NJ: Princeton University Press.

Andersson, M. and Loof, H. (2011). Agglomeration and Productivity: Evidence From Firm-Level Data. Annal Regional Science, 46(3), 601–620.

Arrow, K. J. (1962). The Economic Implications of Learning by Doing. The Review of Economic Studies, 29(3), 155-173.

Barro, R. J., & Sala-i-Martin, X. (1992). Convergence. Journal of Political Economy, 100(2), 223-251.

Batisse, C. (2002). Dynamic externalities and local growth. A panel data analysis applied to Chinese provinces. China Economic Review, 13(2), 231–251.

Beaudry, C., & Schiffauerova, A. (2009). Who’s right, Marshall or Jacobs? The localization versus urbanization debate. Research Policy, 38(2), 318–337.

Besley, T. and R. Burgess (2004). “Can labor regulation hinder economic performance? Evidence from India”, Quarterly Journal of Economics, 119(1), 91-134.

Cingano, F., & Schivardi, F. (2004). Identifying the Sources of Local Productivity Growth. Journal of the European Economic Association, 2(4), 720–742.

Combes, P.-P. (2000). Economic Structure and Local Growth: France, 1984–1993. Journal of Urban Economics, 47(3), 329–355.

Deb, A.K. & Ray, S.C. (2014). An inter-state analysis of total factor productivity growth in selected two-digit manufacturing industries in India, Global Business Review, 15(4 suppl), 59S-86S.

Dekle, R. (2002). Industrial Concentration and Regional Growth: Evidence from the Prefectures. Review of Economics and Statistics, 84(2), 310–315.

Denison, E. F. (1962). Sources of Economic Growth in the United States and the Alternatives Before Us. Supplementary Paper No. 13, Committee for Economic Development.

Dougherty, S. M. (2009). Labour regulation and employment dynamics at the state level in India. Review of Market Integration, 1(3), 295-337.

Gao, T. (2004). Regional industrial growth: Evidence from Chinese industries. Regional Science and Urban Economics, 34(1), 101–124.

Ghani, E., Kerr, W. R., & Tewari, I. (2013). Specialization, diversity, and Indian manufacturing growth. World Bank Policy Research Working Paper No. 6648, World Bank.

Ghosh, B., & De, P. (2004). How do different categories of infrastructure affect development? Evidence from Indian states. Economic and Political Weekly, 4645-4657.

Glaeser, E. L., Kallal, H. D., Scheinkman, J. A., & Shleifer, A. (1992). Growth in Cities. Journal of Political Economy, 100(6), 1126–1152.

Goldar, B., & Kumari, A. (2003). Import liberalization and productivity growth in Indian manufacturing industries in the 1990s. The Developing Economies, 41(4), 436-60.

Goldar, B. (2004). Productivity trends in Indian manufacturing in the pre-and post-reform periods. Working Paper No. 137, Indian Council for Research on International Economic Relations, New Delhi.

Goldar, B. (2013). Sustaining a High Rate of Industrial Growth in India in the Next 10 Years. Working Paper, Institute of Economic Growth, New Delhi.

Greene, W.H. (2008). Econometric Analysis. Englewood Cliffs, NJ: Prentice-Hall.

Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251-1271.

Henderson, V., Kuncoro, A., & Turner, M. (1995). Industrial Development in Cities. Journal of Political Economy, 103(5), 1067-1090.

Henderson, V. (2003). Marshall’s scale economies. Journal of Urban Economics, 53(1), 1–28.

Jacobs, J. (1969). The Economy of Cities. New York: Vintage.

Jorgenson, D. W., & Griliches, Z. (1967). The Explanation of Change Productivity. The Review of Economic Studies, 34(3), 249–283.

Krugman, P. (1991). Geography and Trade. Cambridge, MA: MIT Press.

Lall, S. V., Shalizi, Z., & Deichmann, U. (2004). Agglomeration economies and productivity in Indian industry. Journal of Development Economics, 73(2), 643–673.

Lall, S. V., & Chakravorty, S. (2005). Industrial location and spatial inequality: Theory and evidence from India. Review of Development Economics, 9(1), 47-68.

Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.

Marrocu, E., Paci, R., & Usai, S. (2013). Productivity Growth in the Old and New Europe: the Role of Agglomeration Externalities. Journal of Regional Science, 53(3), 418–442.

Marshall, A. (1890). Principles of Economics. London: Macmillan.

Martin, P., Mayer, T., & Mayneris, F. (2011). Spatial concentration and plant-level productivity in France. Journal of Urban Economics, 69(2), 182–195.

Matlaba, V., Holmes, M., McCann, P., & Poot, J. (2012). Agglomeration externalities and 1981-2006 regional growth in Brazil, Studies in Regional Science, 42(1), 145-161.

Mitra, A. (1999). Agglomeration Economies as Manifested in Technical Efficiency at the Firm Level. Journal of Urban Economics, 45(3), 490–500.

Mitra, A. (2000). Total Factor Productivity Growth and Urbanization Economies: A Case of Indian Industries. Review of Urban & Regional Development Studies, 12(2), 97–108.

Mitra, A., Sharma, C., & Véganzonès-Varoudakis, M. A. (2012). Estimating impact of infrastructure on productivity and efficiency of Indian manufacturing. Applied Economics Letters, 19(8), 779-783.

Paci, R. and Usai, S. (2008). Agglomeration economies, spatial dependence and local industry growth. Revue D ’ Économie Industrielle, 123(7), 87–109.

Porter, M. (1990). The Competitive Advantage of Nations. New York: Free Press.

Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94(5), 1002-1037.

Sharma, C., & Sehgal, S. (2010). Impact of infrastructure on output, productivity and efficiency: Evidence from the Indian manufacturing industry. Indian Growth and Development Review, 3(2), 100-121.

Solow, R. (1957). Technical Change and the Aggregate Production Function. The Review of Economics and Statistics, 39(3), 312–320.

Virmani, M. A., & Hashim, M. D. A. (2011). J-Curve of productivity and growth: Indian manufacturing post-liberalization. Working Paper No. 163, International Monetary Fund.

Journal Information


All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 196 190 18
PDF Downloads 96 93 10