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Abstract:

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SERC/Urban and Spatial Programme Discussion Paper
Industry and the Urge to Cluster: A Study of the Informal Sector in India
Megha Mukim
March 2011
Paper No' SERCDP0072:
Full Paper (pdf)

JEL Classification: R12; R3; O17


Tags: agglomeration economies; informal sector; location choice

This paper studies the determinants of firm location choice at the district-level in India to gauge the relative importance of agglomeration economies vis-à-vis good business environment. A peculiar characteristic of the Indian economy is that the unorganised nonfarm sector accounts for 43.2% of NDP and employs 71.6% of the total workforce. I analyse National Sample Survey data that covers over 4.4 million firms, in both unorganised sectors – manufacturing and services. The empirical analysis is carried out using count models, and I instrument with land revenue institutions to deal with possible endogeneity bias. I find that buyer-suppler linkages and industrial diversity make a district more attractive to economic activity, whilst the quality and level of infrastructure are also important. I conclude that public policy may be limited in its ability to encourage relocation of informal firms.