Which Firms Drive the Gains from Connectivity and Competition ? The Impact of India’s Golden Quadrilateral across the Firm Life Cycle

Arti Goswami Grover, William F. Maloney and Stephen A. O'Connell

No 10710, Policy Research Working Paper Series from The World Bank

Abstract: This paper uses the construction of India's Golden Quadrilateral (GQ) highway to explore the impact of an exogenous increase in market access and competition across the firm life cycle and generates four findings. First, while exit rates fall for all plants, aggregate gains are driven by expansion of young plants. Older plants stagnate or contract, consistent with the challenges of increased competition for incumbents. Second, the benefits of connectivity to young plants depend on access to complementary factors, such as finance, and business conditions, although older plants respond better in more distorted districts, perhaps reflecting access to inputs while protecting output markets as in de Loecker et al. (2016). Third, expanding young plants correspond to capital intensive value chain embedded activities that do not require close coordination with final producers. Fourth, plant-level panel data confirms plant capabilities as central to both the magnitude of the response, and to the composition of plants driving it. Aggregate expansion among young plants is driven by high skill plants while contraction of old plants is driven by low skill plants, consistent with frontier firms being able to escape competition (Aghion et al. 2014).

Date: 2024-02-27
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