Abstract
This paper investigates the role of demand in rural industrialization. We show that, when increasing returns are present, investment multipliers and multiple equilibria can result from demand for intermediate inputs and non-homothetic preferences. We then examine smallscale industrialization in the Guatemalan highlands. We find large differences in the extent and variety of non-farm production across municipalities and evidence of large entry and transportation costs. But the pattern of non-farm production does not fully conform to investment multipliers. We conclude that urbanization favors the emergence of specialized firms and that the export of non-farm products is important for industrialization.
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