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Industrial productivity growth and agglomeration economies (CD)

By: Sharma, Anand.
Material type: materialTypeLabelBookPublisher: Ahmedabad Indian Institute of Management Ahmedabad 2016Description: 188 p.Subject(s): Dynamic externalities and industrial productivity growth | Inter-state variations in industrial performanceDDC classification: TH 2016-03 Summary: Abstract Industries concentrate spatially because dense networks of firms and individuals generate benefits known as agglomeration economies. The literature has established that agglomeration economies have an impact on productivity growth. Three types of dynamic agglomeration externalities have been proposed for explaining this link– Marshall-Arrow-Romer (MAR) specialization externalities, Jacobs’ diversity externalities, and Porter’s competition externalities. The literature is inconclusive about the relative importance of these externalities for influencing industrial growth and productivity. Studies linking the dynamic externalities and regional growth are limited in the Indian context. The existing studies have focused more on static externalities. Further, the previous studies do not account for the possibility of different relative importance of these externalities in labour-intensive and capital-intensive industries. Using Annual Survey of Industries (ASI) data for selected two-digit industries at the state level, this study examines the role of these dynamic agglomeration externalities on industrial growth and productivity during 2001-02 to 2011-12. The first part provides an overview of the inter-state variations in the industrial performance in terms of growth of value added, employment and total factor productivity (TFP) during 2001-02 to 2011-12. The analysis finds that states with capital-intensive manufacturing show faster employment and productivity growth. The second part studies the pattern of regional concentration of two-digit industries during 2001-02 to 2011-12. It also examines the changes in this concentration over time and provides broad explanations for the observed phenomena. The study finds that regional concentration of an industry is a dynamic process and hence, static analysis may be inadequate. The third part tests the three theories of dynamic agglomeration externalities in context of the selected two-digit industries of the Indian manufacturing sector at the state level. This part focuses on the question: Whether own-industry concentration (specialization externalities) or the concentration of diverse industries (diversity externalities) has a greater impact on employment and productivity growth? The study also attempts to examine if the relative importance of these externalities differs in labour-intensive and capital-intensive industries. The results indicate that the impact of dynamic externalities on regional industrial growth should not be examined by pooling all the industries. The study finds that dynamic externalities have a positive impact on employment growth while the effects on TFP growth are unclear. MAR specialization externalities and Porter’s competition externalities positively affect employment growth in capital-intensive industries while Porter’s competition externalities and Jacobs’ diversity externalities positively affect employment growth in labour-intensive industries. To check stability of the findings, the analysis is replicated for a different dataset. These results highlight the unreliability of results obtained by pooling all industries. The findings imply that the policies of specialization and diversification should be formulated according to the nature of an industry. Policymakers should not view specialization and diversity as mutually exclusive; rather they should be treated complimentary depending on the nature and type of industry. These results can have a bearing on the formulation of ‘Make in India’ program that aims to boost the employment generation potential of the manufacturing industries. The results also highlight the crucial role of infrastructure in boosting the employment and productivity growth. Thesis Advisory Committee Prof. Ravindra H. Dholakia [Chairperson] Prof. Prem Pangotra [Member] Prof. Viswanath Pingali [Member]
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Thesis (FPM) Vikram Sarabhai Library
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Reference TH 2016-03 (Browse shelf) Not for Issue CD002459

Table of Contents:

Chapter 1: Introduction and Review of Literature 10
1.1 Background and Introduction 10
1.2 Meaning of Agglomeration 12
1.3 Review of Literature 17
1.4 Research Questions 35
Chapter 2: Methodology and Data Sources 37
2.1 Measurement of Industrial Agglomeration 37
2.2 Empirical Approaches in Literature 41
2.3 Methodology for Estimating Total Factor Productivity Growth 46
2.4 Measurement of Specialization externalities 58
2.5 Measurement of Diversity externalities 60
2.6 Measurement of Competition externalities 63
2.7 Regional Industrial Growth and Agglomeration Externalities 65
2.8 Regional Industrial Productivity Growth and Agglomeration Externalities 65
2.9 Unit of Analysis 68
2.10 Data Sources 69
Chapter 3: Inter-state Variations in Industrial Performance 71
3.1: Regional Disparities in Industrial Development 71
3.2: Overview of Manufacturing Growth in India 73
3.3: State-level performance of Registered Manufacturing 74
3.4: Summary and Conclusion 90
3A: Appendix 93
Chapter 4: Regional Concentration of Manufacturing Industries 100
4.1: Introduction 100
4.2: Method and Data 101
6
4.3: Regional Concentration of Manufacturing Industries 102
4.4: Summary and Conclusion 122
4A: Appendix 124
Chapter 5: Dynamic Externalities and Industrial Productivity Growth 134
5.1: Introduction 134
5.2: Empirical Specification 137
5.3: Data 141
5.4: Employment Results 141
5.5: Employment Results: 2001-02 to 2007-08 147
5.6: TFP Results 149
5.7: Discussion 152
5.8: Conclusion 154
5A: Appendix 156
Chapter 6: Summary and Conclusion 168
6.1: Summary and Main Findings 168
6.2: Policy Implications 172
6.3: Main Contribution of the Study 174
6.4: Limitations and Directions for Future Research 174
References 176

Abstract

Industries concentrate spatially because dense networks of firms and individuals generate benefits known as agglomeration economies. The literature has established that agglomeration economies have an impact on productivity growth. Three types of dynamic agglomeration externalities have been proposed for explaining this link– Marshall-Arrow-Romer (MAR) specialization externalities, Jacobs’ diversity externalities, and Porter’s competition externalities. The literature is inconclusive about the relative importance of these externalities for influencing industrial growth and productivity. Studies linking the dynamic externalities and regional growth are limited in the Indian context. The existing studies have focused more on static externalities. Further, the previous studies do not account for the possibility of different relative importance of these externalities in labour-intensive and capital-intensive industries. Using Annual Survey of Industries (ASI) data for selected two-digit industries at the state level, this study examines the role of these dynamic agglomeration externalities on industrial growth and productivity during 2001-02 to 2011-12.
The first part provides an overview of the inter-state variations in the industrial performance in terms of growth of value added, employment and total factor productivity (TFP) during 2001-02 to 2011-12. The analysis finds that states with capital-intensive manufacturing show faster employment and productivity growth. The second part studies the pattern of regional concentration of two-digit industries during 2001-02 to 2011-12. It also examines the changes in this concentration over time and provides broad explanations for the observed phenomena. The study finds that regional concentration of an industry is a dynamic process and hence, static analysis may be inadequate.
The third part tests the three theories of dynamic agglomeration externalities in context of the selected two-digit industries of the Indian manufacturing sector at the state level. This part focuses on the question: Whether own-industry concentration (specialization externalities) or the concentration of diverse industries (diversity externalities) has a greater impact on employment and productivity growth? The study also attempts to examine if the relative importance of these externalities differs in labour-intensive and capital-intensive industries. The results indicate that the impact of dynamic externalities on regional industrial growth should not be examined by pooling all the industries. The study finds that dynamic externalities have a positive impact on employment growth while the effects on TFP growth are unclear. MAR specialization externalities and Porter’s competition externalities positively affect employment growth in capital-intensive industries while Porter’s competition externalities and Jacobs’ diversity externalities positively affect employment growth in labour-intensive industries. To check stability of the findings, the analysis is replicated for a different dataset. These results highlight the unreliability of results obtained by pooling all industries.
The findings imply that the policies of specialization and diversification should be formulated according to the nature of an industry. Policymakers should not view specialization and diversity as mutually exclusive; rather they should be treated complimentary depending on the nature and type of industry. These results can have a bearing on the formulation of ‘Make in India’ program that aims to boost the employment generation potential of the manufacturing industries. The results also highlight the crucial role of infrastructure in boosting the employment and productivity growth.

Thesis Advisory Committee

Prof. Ravindra H. Dholakia [Chairperson]
Prof. Prem Pangotra [Member]
Prof. Viswanath Pingali [Member]

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