Input Complementarities and Weak Links: Evidence from Indian Manufacturing

The main question we are addressing in this research project is: to what extent do the least productive sectors in developing economies become ‘bottlenecks’ and hold back economic development? We will answer this question focusing on India, which has undergone large structural reforms over the last 25 years. In order to answer our research question, we first study – at the micro level - how easily firms (and hence sectors) can substitute away from inputs sourced from these low productivity sectors. Our empirical results will have important implications for our understanding of the barriers to firm growth. Next, we will embed the results of our micro-analysis into an aggregate model that will allow us to identify bottleneck sectors. Our preliminary results are encouraging as to the strength of this mechanism. We require SEED funding for two important purposes. First, we need to hire an RA to help us solve a data consistency issue. Second, we plan to travel to India this summer, both to speak to representatives of the Central Statistical Office and to conduct some interviews with firms in our dataset.