The World Bank estimates that the developing economies will expand 6.4% in 2007 led by India and China, more than twice as fast as the 2.4% for the high-income countries (including 2.1% for the US economy).
So it is easy to imagine India and China influencing the growth of the global economy quite substantially. In fact, much of the growth in India and China has been attributed to the programme of economic reform that started in these countries, respectively, in 1991 and 1978. Ever since, the private sector has been an important driver of growth in these countries.
This, of course, is no more news. What is indeed interesting is that a substantial portion of the GDP in these countries is originating in their urban areas. About 30% of India’s population and 37% of China’s population was urbanized as of 2001. While cities in China account for 70% of the nation’s GDP, close to half of India’s GDP originates in its urban areas, and this is expected to increase to about 65% by 2011. In China, per capita disposable incomes in towns and cities, where more than 500 million people live, rose 10% in the first nine months of 2006. In India, the number of households earning an annual income of at least $10,000 is rising more than 20% a year.
Given the significance of industrial growth in India and China, their relevance for the global economy, and the important role played by private firms and urban areas in these countries in the post-reform period, the important question is what determines firms’ choice of location in the urban areas of India and China. This could determine the sustainability of their growth. Recent research has tried to explain the locational choice of firms in cities with population greater than one million, in each of these countries, by making use of large data sets of firms studied by the World Bank’s Investment Climate Surveys (ICS), amongst many others.
As capital cities attract firms by offering various services and agglomeration economies, comparing the location choice of firms across such cities would not be very interesting. But the rise of million-plus cities in India and China, and their importance as magnets for business location, is worth analysing, since the spatial distribution of firms in this context varies vastly. While in India, two-thirds of ICS-surveyed firms were located in cities with million-plus population, in China, the comparable figure was 80%.
The research finds that for India’s firms, the indicators of infrastructure administration such as delays in obtaining electrical connections, labour laws, and firms’ perceptions on transportation, as well as the size of firms influence their decisions to locate in a ‘million-plus’ city. For instance, the delays to obtain electrical connection by Indian firms are quite long—the average waiting period being 82 days— compared with 18 days on average for a firm in China.
Further, firms that started operations in the post-1991 (reforms) period in India were averse to locating in the million-plus cities, based on data from ICS. This finding may be attributed to the bureaucratic regulations in these cities or the recent steep increase in the costs of doing business (especially the cost of acquiring real estate) in such large cities in the post-1991 period.
Greater delays in obtaining electrical connections also lowered the probability that a firm would locate in the city. Both in terms of average unit cost of electricity and the percentage of sales lost due to power outages/surges, Indian firms were worse off. This likely explains why more than 80% of the ICS-surveyed Chinese firms did not own or share a generator, while nearly two-thirds of their Indian counterparts did.
This research also finds that the higher the number of full-time workers India’s firms were able to employ without any restrictions (i.e. without seeking permission, or having to make severance payments), the greater was the probability of their location in a million-plus city.
The estimated model also suggested that small firms in India were unlikely to locate in cities with million-plus population. Despite the many incentives they are eligible for in India, small firms are likely to have affordability constraints in accessing resources such as real estate, skills, inputs, and in marketing their products in major cities.
In the case of China, the infrastructure indicators that affected firms’ decisions to locate in a million-plus city included reliance on municipal water, bureaucratic regulation and firms’ perceptions.
Significantly, when controlled for firm-level efficiency, this research finds Indian firms much more successful in overcoming inhospitable business environments. Delayed provision of infrastructure services no longer deters their location decisions.
On the other hand, even when firm-level efficiency is controlled for, Chinese firms’ decisions are still affected by constraints such as labour and regulation. These findings, while suggesting that India’s high-efficiency firms are much more adaptable than their Chinese counterparts, also highlight the need for substantial improvement in India’s infrastructure as well as its administration.
Kala S. Sridhar is fellow, National Institute of Public Finance and Policy, New Delhi. These are her personal views. This research was presented at a workshop on ‘The Rapid Development of China and India’ at the University of Antwerp, Belgium. Do write to us at firstname.lastname@example.org