Place-Based Policies and Agglomeration Economies: Firm-Level Evidence from Special Economic Zones in India

This paper exploits time and geographic variation in the adoption of Special Economic Zones in India to assess the direct and spillover effects of the program. We combine geocoded firm-level data and geocoded SEZs using a concentric ring approach. Our analysis yields that conditional on controlling for initial selection, SEZs induced negative effects on the productivity growth of within SEZ firms and no evidence for spillovers. In further analysis, we find that the significant negative effects on firms disappear once only looking at commercial SEZs, supporting the idea that government interference plays a role. We also show that the directors of firms located inside the zones experienced a significant increase in their total remuneration, suggesting excessive rent-seeking as a possible explanation for negative productivity effects. Additionally, we estimate the effect only for relatively large, i.e. above mean area, SEZs. Interestingly, we find a strong positive and sizable in magnitude productivity growth increase for inside SEZ firms. These results are in line with the idea that the inefficiency of the program may be due to one peculiarity of the Indian program design, where SEZs can be single-firm entities, which may make political interference and rent-seeking more likely than in a large SEZ with multiple firms.