Determinants of Clusters in Indian Manufacturing: The Role of Infrastructure, Governance, Education, and Industrial Policy

This paper investigates the determinants of spatial concentration and entry within manufacturing across states in India. Using an unbalanced panel of 180 industries spread across 16 major Indian states over the time period 1985-2007, we estimate the effect of location (state) characteristics interacted with characteristics that make industries naturally more prone to concentrate in locations (states) of certain types on spatial concentration and entry. The results show that governance, infrastructure and the availability of skilled labor are important determinants of increased concentration and entry. Moreover, the estimates indicate that state characteristics associated with lower distance to foreign markets, lower costs of accessing domestic suppliers, or lower costs of doing business matter for the impact of licensing, FDI and trade reforms on concentration and new entry. There is also evidence that less substitutable inputs (e.g. roads) raise spatial concentration while more substitutable inputs (e.g. electricity) do not.