The Impact of Industrial Policy and Export Processing Zones on Technological Growth: Evidence from a Panel of 7 Million Indian Firm Financial Statements

Benjamin Hyman, Ph.D. Student in Applied Economics

Abstract: Scholars of industrial, trade, and urban economics have long been concerned with understanding the determinants of firm growth, and the mechanisms through which it propagates. Central to research in this area is the question of what role externalities and market imperfections play (if any) in hindering total factor productivity (TFP) growth, and whether the existence and magnitude of such externalities warrant public intervention. This project evaluates a natural experiment presented by India’s ten year National Manufacturing Plan (2011). It specifically analyzes India’s National Investment and Manufacturing Zone (NIMZ) project—a large-scale industrial policy that establishes ten 50 square-kilometer export processing zones (EPZs) as greenfield investment townships through which eligible firms receive capital project subsidies, tax breaks for exports, and public infrastructure outlays—concessions intended to increase India’s competitiveness in manufacturing. The research leverages exogenous variation from the point threshold of the bidding process through which firms apply to EPZs and investigate whether zone entry induces a positive productivity differential against a comparable group of statistically equivalent firms. Contingent on the existence of a positive TFP differential, the study then tests for whether the program effect varies with proximity to cities to tease out whether firms privately underinvest in R&D and technology (or “productive capital”) due to the risk of agglomeration spillovers, or whether instead other capital and technology market imperfections common to all zones (such as weak Intellectual Property laws) drive the hypothesized inefficient level of investment.