Industries concentrate spatially because dense networks of firms and individuals generate benefits known as agglomeration economies. The literature has established that agglomeration economies have an impact on productivity growth. Three types of dynamic agglomeration externalities have been proposed for explaining this link– Marshall-Arrow-Romer (MAR) specialization externalities, Jacobs’ diversity externalities, and Porter’s competition externalities. The literature is inconclusive about the relative importance of these externalities for influencing industrial growth and productivity. Studies linking the dynamic externalities and regional growth are limited in the Indian context. The existing studies have focused more on static externalities. Further, the previous studies do not account for the possibility of different relative importance of these externalities in labour-intensive and capital-intensive industries. Using Annual Survey of Industries (ASI) data for selected two-digit industries at the state level, this study examines the role of these dynamic agglomeration externalities on industrial growth and productivity during 2001-02 to 2011-12.
The first part provides an overview of the inter-state variations in the industrial performance in terms of growth of value added, employment and total factor productivity (TFP) during 2001-02 to 2011-12.