This debate is, in many respects, a very old question dating back to Alfred Marshall and Jane Jacobs. Marshall (1890) established the field of agglomeration and the study of clusters by noting the many ways in which similar firms from the same industry can benefit from locating together. Glaeser et al (1992) famously described how Marshall-Arrow-Romer type externalities predict that spillovers come from within industries, especially when concentration is high, and can lead to local job growth. Porter (1990) also holds that spillovers emerge from within industries, but only in the presence of competition. Jacobs (1969), on the other hand, pushed back against these perspectivesshe emphasised how knowledge flows across industries, and that industrial variety and diversity are conducive to growth. While these issues have been widely discussed over the past two decades, our understanding of their practical application to an environment like India is very limited.
In a recent research paper, we measure specialisation and diversity for the manufacturing and services sectors in India and compare it to the US (Ghani et al 2014). Services have been very important for Indias development, and notions of local specialisation and diversity extend well beyond the manufacturing sector. We use establishment-level data that comes from the economic censuses of India (e.g. Annual Survey of Industries, National Sample Survey).
The specialisation index identifies the degree to which one industry is concentrated in a district compared to the nation as a wholefor example, a district may draw 10% of its employment from a single industry that nationally accounts for only 1% of Indias employment. The specialisation metric quantifies the largest such deviation for a district.
The diversity index considers the districts industrial composition as a whole. It asks, looking across all of the industries for a district, the overall degree to which the district resembles India as a whole. A highly diversified district contains an industrial structure that is similar to Indias overall employment distributions nationally.
Indices on specialisation and diversification are related to each other but not redundant. The two indices measure different thingsspecialisation captures extreme concentration of one industry in one location, while diversity looks at the whole picture for a district. It is quite feasible for a district to have specialisation and diversity values that are both above average. In the year 2000, about 20% of Indias districts had above-median values on both indices, while 20% of districts had below-median values on both indices. A district can be both specialised and diversified. This happens, for example, if it has a large industrial base (relative to the country) in many different industries. For example, Jaunpur district in Uttar Pradesh, which exhibits high specialisation in radio equipment, also has high levels of diversity.
Around the time of liberalisation in 1991, Indias manufacturing sector displayed more specialisation and greater spatial (regional) variation in specialisation rates than the US. India has converged towards the US baseline in the two decades since then.
Our research shows that Indian districts throw up extreme values for both the specialisation and diversity (see table) indices. Some examples of highly specialised districts are Lakshwadeep in water services, Darjeeling in paper products and Bhopal in wood products.
Our index values for both specialisation and diversity do not depend directly on the size or economic advancement of a region. No more than four of the 12 districts are in the same Indian state. Likewise, specialisation and diversity are related, but not one-for-one. Only two of the 24 districts that have an extreme average value on the specialisation index also have an extreme value on the corresponding diversity lists. Interestingly, some of the major urban areas like Mumbai and Bangalore have undergone the largest declines in specialisation.
Diversity and growth in Indian manufacturing and services
So what are the key findings
First, overall employment in India is strongly linked to local diversity. That is, districts that had a broad set of industries in the year 2000 exhibited greater employment growth over the subsequent decade. As providing jobs and employment opportunities is a key objective for policymakers, this relationship is critical to identify.
Second, we find that initial clusters of modern services experienced abnormally high employment growth in the post-2000 period.
Third, there are some interesting nuances. We find that the strongest expressions of this employment growth due to diversity are in settings not often linked to the theories of diversitys benefits. The effects are sharper in rural areas of districts, in districts with low population density, and among the unorganised/informal sector. Reflecting this, we emphasise in our work the inclusive nature of employment growth due to diversity.
While one is not able yet to quantify fully all of the channels through which initial diversity is linked to local employment growth, our findings suggest that the local reach of diversity to job creation is deeper than previously expected. Beyond the standard arguments about diversity in nursery cities and innovation, we need to understand the role of diversity outside of the most prominent clusters.
Ejaz Ghani, William Kerr & Ishani Tewari