Market Integration, Demand and the Growth of Firms: Evidence from a Natural Experiment in India
In many developing countries, the average firm is small, does not grow and has low productivity. Lack of market integration and limited information on non-local products often leave consumers unaware of the prices and quality of non-local firms. They therefore mostly buy locally, limiting firms’ potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat-building industry. As consumers learn more about non-local builders, high quality builders gain market share and grow, while low quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality-adjusted consumer prices decline.
We would like to thank Satish Babu, Peter Cherian, C.M. Jolly, X. Joseph, David McKenzie, C.K. Muhammad, Prakash Nair, Mai Nguyen, M. Philip, P. Philip, V. Rajan, T.K. Sidhique, Joseph Thomas, Jolly Thoms, Eric Zou, two anonymous referees and the editor for helpful comments and discussion. Financial support was provided by the Dean’s Research Fund at the Harvard Kennedy School. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Robert Jensen & Nolan H. Miller, 2018. "Market Integration, Demand, and the Growth of Firms: Evidence From a Natural Experiment in India," American Economic Review, vol 108(12), pages 3583-3625.