Does electrification cause industrial development? Grid expansion and firm turnover in Indonesia

Abstract

I ask whether electrification causes industrial development. I combine newly digitized data from the Indonesian state electricity company with rich manufacturing census data. To understand how electrification can cause industrial development, I shed light on an important economic mechanism — firm turnover. In particular, I study the effect of the extensive margin of electrification (grid expansion) on the extensive margin of industrial development (firm entry and exit). To deal with endogenous grid placement, I use an instrumental variable approach exploiting the location of colonial electric infrastructure and the need for an interconnected grid on the island of Java. I find that electrification causes industrial development by increasing the number of manufacturing firms, manufacturing workers, and manufacturing output. Electrification increases firm entry rates, but also exit rates, and entry accounts for most of the increase in output. This is consistent with electrification lowering entry costs, increasing competition, and forcing unproductive firms to exit more often.