Quality upgrading and productivity gains from domestic market access changes in India

Taking advantage of a major highway project in India, I find that increased access to domestic high-income markets caused productivity gains and quality upgrading among local manufacturing plants. These findings extend existing results on the productivity and quality upgrading effects of exporting to high-income countries to a setting with much narrower income difference between the local and destination markets. However, increased access to domestic high-income markets was not as transformative as exporting. There is mixed evidence on wages that are limited to production workers, who are typically less skilled than non-production workers. It also did not lead to more intensive use of non-production labor. Moreover, there were no effects on the prices of intermediate inputs or the share of imported inputs, suggesting that plants did not use higher-quality inputs. Despite some limitations, domestic high-income markets appear to be viable substitutes for foreign markets, which remain inaccessible to most firms in developing countries.