There are striking, persistent regional inequalities in developing countries like China
and India. I use district-level data on Indian factories to investigate if these disparities are
related to the spatial immobility of capital. Employing a differences in differences strategy,
I compare across districts the investment response to a 1998 policy change which expanded
the set of factories eligible for a directed bank credit scheme. If capital is immobile then
the returns to it, and hence this response, would be lower in wealthier districts. I find
that districts which gained more from modern high-yield seeds released at the start of the
agricultural “Green Revolution” in the late 1960s responded less to the 1998 credit shock,
indicating that these districts- wealthier and more industrialized today- have lower returns
to capital. The size of this differential effect suggests that a district at the 25th percentile
of the initial HYV adoption distribution has 34% higher returns to capital than one at
the 75th percentile. Thus, improving capital mobility will reduce regional inequalities and
inefficiencies by directing investment to poorer, high-return districts.