Location Choice of Firms in Cities of India and China

This paper relates to economic change in India since 1991, and evaluates oneaspect of it, using China as a benchmark. Given the significance of industrial growth inIndia and China, their relevance for the global economy, and the important role played byprivate firms and urban areas in these countries in the post-reform period, in this paper, Ianswer the question as to what determines the locational choice of firms in the urbanareas of India and China. I estimate the locational choice of firms in cities with greaterthan million population, in each of these countries. I make use of large data sets of firmssurveyed by the World Bank in India, and in China, amongst many other countries (calledas the Investment Climate Surveys (ICS)). I find that for India’s firms, the indicators ofinfrastructure administration such as delays in obtaining electrical connections, laborregulations, and firm-level perceptions pertaining to transport, and the size of firmsinfluence their decisions to locate in a ‘million-plus’ city. In China, objective indicatorsof infrastructure such as reliance on municipal water sources, bureaucratic regulation andfirm perceptions determine firm location choice in a million-plus city. When controlledfor firm-level efficiency, I find India’s firms are much more successful in overcominginhospitable business environments, and delays in the provision of infrastructure serviceswhich do not deter their location decisions any more. However, when firm-levelefficiency is controlled for in China, China’s firms are unable to overcome constraintssuch as labor and bureaucratic regulation that continue to influence their locationdecisions in million-plus cities there. These findings, while suggesting that India’s highefficiency firms are much more adaptable and efficient than their Chinese counterparts,show that there is a need for substantial improvement in India’s infrastructure and itsadministration