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Why Are Manufacturing Plants Smaller in Developing Countries? Theory and Evidence from India

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  • Anil K. Jain
  • Siddharth Kothari

Abstract

Poorer countries (and poorer states within India) have a larger share of manufacturing employment in small plants. This paper presents empirical evidence and a theoretical model to show that this relationship is driven by greater demand in poorer regions for lower-quality goods, which can be produced efficiently in small plants. First, using data for India, we show that richer households buy higher-price goods and larger plants produce higher-price products. Second, we develop an illustrative model that matches these facts. Finally, we find that our model explains about 40% of the cross-state variation in the size distribution of manufacturing plants in India.

Suggested Citation

  • Anil K. Jain & Siddharth Kothari, 2026. "Why Are Manufacturing Plants Smaller in Developing Countries? Theory and Evidence from India," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 4(3), pages 563-612.
    • Handle: RePEc:ucp:jpemac:doi:10.1086/741533
    DOI: 10.1086/741533
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