10 Nov 2011Working Paper Summaries

Spatial Determinants of Entrepreneurship in India

by Ejaz Ghani, William R. Kerr and Stephen O'Connell

In South Asia, which regional traits encourage local entrepreneurship? While multiple studies have considered this question in advanced economies, especially for the manufacturing sector, there has been very little empirical evidence for developing countries like India. While India has historically had low entrepreneurship rates, this weakness is improving and will be an important stepping stone to further development. In this paper, the authors explore the spatial determinants of local entrepreneurship in India for both manufacturing and services. At the district level, their strongest evidence points to the roles that local education levels and physical infrastructure quality play in promoting entry. They also find evidence that strict labor regulations discourage formal sector entry, and better household banking environments encourage entry in the unorganized sector. The paper then evaluates how incumbent industrial structures of cities shape the type of entrants that emerge in local areas. Startups are more frequent for a city in industries that share common labor needs or have customer-supplier relationships with the city's incumbent businesses. This is among the first studies to quantify the spatial determinants of entrepreneurship in India. Moreover, it moves beyond manufacturing to consider services, which are very important for India's economic growth. Key concepts include:

India's economic geography is still taking shape since the deregulations of the 1980s and 1990s. The spatial distribution of startups in India is more fluid than in the United States.
The two most consistent factors that predict overall entrepreneurship for a district are education and the quality of local physical infrastructure. These patterns are true for manufacturing and services.
Like previous research, this paper also links strict labor regulations in India to slower economic growth and development. This pattern is especially apparent for the organized manufacturing sector where these laws are most binding.
The incumbent compositions of local industries influence new entry rates at the district-industry level within manufacturing. This influence operates through channels like access to common labor resources or customer-supplier relationships.

Author Abstract

We analyze the spatial determinants of entrepreneurship in India in the manufacturing and services sectors. Among general district traits, quality of physical infrastructure and workforce education are the strongest predictors of entry, with labor laws and household banking quality also playing important roles. Looking at the district-industry level, we find extensive evidence of agglomeration economies among manufacturing industries. In particular, supportive incumbent industrial structures for input and output markets are strongly linked to higher establishment entry rates. We also find substantial evidence for the Chinitz effect where small local incumbent suppliers encourage entry. The importance of agglomeration economies for entry hold when considering changes in India's incumbent industry structures from 1989, determined before large-scale deregulation began, to 2005.