Connectivity alone cannot drive manufacturing growth: WB study

Chennai: A World Bank study on impact of Golden Quadrilateral on the manufacturing sector has revealed that connectivity alone does not drive growth.

The study was done to understand on the net effect of the construction of India’s Golden Quadrilateral (GQ) highway connecting the four major cities in India – Delhi, Mumbai, Chennai, and Kolkata on the manufacturing sector as the popular notion is that enhanced market access and increased competition facilitated by greater connectivity are critical drivers of firm dynamics and overall growth.

The study found that young manufacturing plants drive the previously documented aggregate positive effects of proximity to the GQ network, while older plants show insignificant or negative effects. Younger plants tend to be more capital intensive and engaged in value chains, suggesting an important domestic “offshoring” dynamic along the GQ.

The diverging responsiveness over time between young and older plants suggests that in the long-run older plants will contract and possibly exit. The evidence suggests that this process may take decades.

Moreover, building roads is not sufficient for local industrial development. The responsiveness of young plants is blunted where factor markets are incomplete, or the business climate is distorted. Further, older plants are less sensitive to misallocation in input and output markets, suggesting that over time they have devised ways around them. The fact that older plants respond better to proximity to the GQ in more distorted districts suggests that they protect their output market while benefiting from cheaper inputs.

Finally, plant and workforce capabilities are critical complements to physical infrastructure, allowing escape from new competition and taking advantage of new markets: young plants with high human capital or capabilities drive the aggregate positive response to connectivity among these plants, while older plants with low human capital or capabilities drive their contractionary tendencies.