Why Are Manufacturing Plants Smaller in Developing Countries? Theory and Evidence from India

Anil K. Jain and Siddharth Kothari

Journal of Political Economy Macroeconomics, 2026, vol. 4, issue 3, 563 - 612

Abstract: Poorer countries (and poorer states within India) have a larger share of manufacturing employment in small plants. This paper presents empirical evidence and a theoretical model to show that this relationship is driven by greater demand in poorer regions for lower-quality goods, which can be produced efficiently in small plants. First, using data for India, we show that richer households buy higher-price goods and larger plants produce higher-price products. Second, we develop an illustrative model that matches these facts. Finally, we find that our model explains about 40% of the cross-state variation in the size distribution of manufacturing plants in India.

Date: 2026
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