Dynamic Externalities and Regional Manufacturing Growth: Evidence from India

Abstract

Using Annual Survey of Industries (ASI) dataset for 11 two-digit manufacturing industries and 20 states, this paper tests the relationship between dynamic agglomeration externalities and regional manufacturing growth for India. Three types of dynamic externalities have been proposed in the literature for explaining this relationship – Marshall-Arrow-Romer (MAR) specialization externalities, Jacobs’s diversity externalities, and Porter’s competition externalities. This paper examines the effect of these dynamic externalities on regional manufacturing employment and total factor productivity (TFP) growth for selected Indian industries between 2001-02 and 2011-12. The panel data model results show that dynamic externalities are important in influencing employment growth but they do not seem to have an impact on the growth of manufacturing productivity. Further, the results show that specialization externalities positively affect the employment growth of capital-intensive industries whereas diversity externalities favourably affect the employment growth in labour-intensive industries. Our results suggest that the importance of dynamic externalities should not be examined by pooling all industries. The results also highlight the importance of infrastructural investments for boosting the growth of manufacturing employment and productivity.