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Business environment, clustering, and industry location: evidence from Indian cities

Somik Lall and Taye Mengistae ()

No 3675, Policy Research Working Paper Series from The World Bank

Abstract: How do differences in the local business environment influence location of industry within countries? How do the benefits of a good business environment compare with those from good market access and agglomeration economies from industry clustering? The authors examine these questions by analyzing location decisions of individual firms. Using data from a recently completed survey of manufacturing firms in India, they find that both the local business environment and agglomeration economies significantly influence business location choices across cities. In particular, excessive regulation of labor and of other industrial activities reduces the probability of a business locating in a city. The authors'findings imply that in order to attract industrial activity, smaller or remoter cities need to offer even more attractive policy concessions or reforms to offset the effects of their relatively adverse (economic) geography. Their methodology pays special attention to the identification of agglomeration economies in the presence of unobserved sources of natural advantage.

New Economics Papers: this item is included in nep-cwa, nep-dev, nep-geo and nep-ure
Date: 2005-08-01
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