Social fragmentation and productivity in colonial India

In this paper, we examine the role of social environment on firm productivity using the case of textile mills in twentieth century India. During the twentieth century, Indian textile mills were known for lower productivity than the contemporary British, American, or Japanese mills. While most of the existing studies offered explanations by directly making cross-country comparisons, we seek to explain productivity differences across Indian firms. We argue that low productivity of textile mills in colonial India was a result of a failure to generate tacit knowledge which was critical for technology adoption. The process of tacit knowledge creation depended on exchange of knowledge and ideas at the social level and therefore, is a function of demographic factors and ethnic composition of the society. In our paper, we combine input-output data from colonial textile firms with city level demographic characteristics in colonial India and estimate the effect of age structure, religious composition, and caste fragmentation on productivity. We find that the city level Muslim-Hindu ratio and inter-religion conflict negatively affected textile productivity in colonial India. The textile mills in the twentieth century India used a combination of American (ring frame) and British (mule frame) technology. We also find that cities with higher caste fragmentation were more likely to adopt American technology which required less coordination.