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Business environment, clustering, and industry location : evidence from Indian cities

  • Lall, Somik V.
  • Mengistae, Taye

How do differences in the local business environment influence location of industry within countries? How do the benefits of a good business environment compare with those from good market access and agglomeration economies from industry clustering? The authors examine these questions by analyzing location decisions of individual firms. Using data from a recently completed survey of manufacturing firms in India, they find that both the local business environment and agglomeration economies significantly influence business location choices across cities. In particular, excessive regulation of labor and of other industrial activities reduces the probability of a business locating in a city. The authors'findings imply that in order to attract industrial activity, smaller or remoter cities need to offer even more attractive policy concessions or reforms to offset the effects of their relatively adverse (economic) geography. Their methodology pays special attention to the identification of agglomeration economies in the presence of unobserved sources of natural advantage.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3675.

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Date of creation: 01 Aug 2005
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Handle: RePEc:wbk:wbrwps:3675
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  1. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc.
  2. Glenn Ellison & Edward L. Glaeser, 1994. "Geographic Concentration in U.S. Manufacturing Industries: A Dartboard Approach," NBER Working Papers 4840, National Bureau of Economic Research, Inc.
  3. Amiti, Mary & Javorcik, Beata Smarzynska, 2005. "Trade costs and location of foreign firms in China," Policy Research Working Paper Series 3564, The World Bank.
  4. Baldwin,John R. & Gorecki,Paul, 1998. "The Dynamics of Industrial Competition," Cambridge Books, Cambridge University Press, number 9780521633574, Junio.
  5. Alm, James & Annez, Patricia & Modi, Arbind, 2004. "Stamp duties in Indian states - a case for reform," Policy Research Working Paper Series 3413, The World Bank.
  6. Venables, Anthony J, 1993. "Equilibrium Locations of Vertically Linked Industries," CEPR Discussion Papers 802, C.E.P.R. Discussion Papers.
  7. Abhijit Banerjee & Lakshmi Iyer, 2005. "History, Institutions, and Economic Performance: The Legacy of Colonial Land Tenure Systems in India," American Economic Review, American Economic Association, vol. 95(4), pages 1190-1213, September.
  8. Somik Vinay Lall & Sanjoy Chakravorty, 2005. "Industrial Location and Spatial Inequality: Theory and Evidence from India," Review of Development Economics, Wiley Blackwell, vol. 9(1), pages 47-68, 02.
  9. Lisa A. Cameron & Mary Amiti, 2004. "Economic Geography and Wages," Econometric Society 2004 Australasian Meetings 253, Econometric Society.
  10. Lall, Sanjaya, 1999. "India's Manufactured Exports: Comparative Structure and Prospects," World Development, Elsevier, vol. 27(10), pages 1769-1786, October.
  11. Henderson, Vernon & Kuncoro, Ari & Turner, Matt, 1995. "Industrial Development in Cities," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1067-90, October.
  12. Deichmann, Uwe & Kaiser, Kai & Lall, Somik V & Shalizi, Zmarak, 2005. "Agglomeration, transport, and regional development in Indonesia," Policy Research Working Paper Series 3477, The World Bank.
  13. Fujita, Masahisa & Mori, Tomoya, 1996. "The role of ports in the making of major cities: Self-agglomeration and hub-effect," Journal of Development Economics, Elsevier, vol. 49(1), pages 93-120, April.
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