Tuesday, November 19, 2019

Summarising the entrepreneurship, urbanisation, and job creation research

Ejaz Ghani and his team have done some very good work on entrepreneurship, urbanisation, and job creation in India by studying granular data on economic activity in nearly 650 districts across services and manufacturing, and formal and informal sectors, and come up with certain observations. 

A summary of their clear takeaways (most of them were already well known, nevertheless a summary is useful):

1. New and young firms form the overwhelming share of net job creation

2. Urban areas are responsible for all of net job creation in manufacturing

3. Among the factor market distortions, the biggest and most critical is that involving land markets. Land is critical to both set up the enterprises as well as to raise capital. Distortions in this market drive spatial dynamics of economic activity.

4. The primary driver of entrepreneurship and job creation are investments in physical infrastructure and human resources, with the former being critical for manufacturing, and the latter for services. Ease of doing business, differential rates of returns etc are all distant secondary.

5. Firms face centripetal (access to markets, labour supply, good infrastructure, economies of scale etc) and centrifugal (cheaper cost of land, housing affordability, traffic congestion etc) forces in urban areas. In case of the large firms, the latter dominate, making them shift away from the large cities towards rural areas beside major transport corridors - de-urbanisation of manufacturing. In case of SMEs, the former dominate, making them shift to the large cities.

6. But the medium-sized (secondary) cities in India are not well equipped to support the shifting larger firms, nor be attractive enough for the SMEs. Prioritise the development of infrastructure and human resource investments in these cities.

7. The result is an uneven spatial development compared to other countries, with most productivity and growth concentrated within large cities.

8. Nevertheless low-density intermediate towns and cities (secondary) have been growing faster than the high-density large cities, pointing to the power of the inherent dynamic of economic growth.

9. Investments in the Golden Quadrilateral (GQ) is associated with heightened firm entry growth in non-nodal districts within 10 km of the network in industries that are land and building intensive, but even reduction in those further away pointing to displacement effects (as well as the importance of such transportation infrastructure). The GQ nodal districts experienced shifts towards industries less intensive in land and buildings. In the net, GQ improved the spatial allocation of economic activity in India. It activated economic activity in medium-density cities.

The conclusion is very clear - focus on human resource development (education and health), and development of physical infrastructure. Without this foundational requirement, rest all is tinkering at the margins.

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