The Impact of Business Environment and Economic Geography on Plant-Level Productivity: An Analysis of Indian Industry

Our analysis of manufacturing plants sampled from India's major industrial centers shows large produc tivity gaps across cities. The gaps partly reflect differences in agglomeration economies and in market access. However, they are also explained to a greater extent by differences in the degree of labor regulation and in the severity of power shortages. This is indication that governments can help narrow regional disparities in industrial growth by fostering the "right business environment" in locations where industry might otherwise be held back by powerful forces of economic geography. There is indeed a pattern in the data whereby geographically disadvantaged cities seem to compensate partially for their natural disadvantage by having a better business environment than more geographically advantaged locations.