Do Localization Economies Matter in Cluster Formation? Questioning the Conventional Wisdom with Data from Indian Metropolises

Abstract

The large and growing literature on industrial clustering suggests that firms seek locations that provide localization economies (benefits from having common buyers and suppliers, a specialized or skilled labor pool, and informal knowledge transfers). This study of manufacturing industry clusters in three Indian metropolises suggests instead that industry location decisions are guided by market imperfections, specifically rigidities in the land market caused by state action (segregationist or environmental policies, the absence of exit policies, and activist industrial promotion policies). For the investigation the authors use geographically disaggregated industry location and size data from Mumbai, Kolkata, and Chennai, to analyze eight industrial sectors (food and beverages, textiles, leather, printing and publishing, chemicals, metals, machinery, and electrical and electronics). The authors test for evidence of global and local clustering and distinguish between and test for coclustering and colocation of industries. The results are indicative rather than absolute and suggest that for location decisions general urbanization economies are more important than are localization economies.