COAGGLOMERATION AND NEW ECONOMIC ACTIVITY: EVIDENCE FROM FORMAL AND INFORMAL MANUFACTURING FIRMS

For much of the twentieth century the predominant belief was that informal entrepreneurship would disappear with higher rates of economic growth. However, the informal sector has persisted in most countries and has grown in some, which calls for a re-evaluation of the existing notions of informal entrepreneurship. An important strand of literature in the form of structuralist and neo-liberal theory provides an alternative explanation. We use the coagglomeration framework to understand the relevance of these theories in the case of India. Using firm-level data, we use the Coagglomeration index to calculate the tendency of formal and informal firms to locate in the same region. We also calculate three types of linkages between formal and informal sectors: buyer-supplier, labor and technology. Further, we use panel data to estimate the relative importance of these linkages in explaining coagglomeration between formal and informal manufacturing firms. We find that coagglomeration in India is driven by buyer-supplier linkage. We then use count data models to determine the effect of coagglomeration and agglomeration measures on new firm birth in the formal and informal sector. We find that coagglomeration positively affects new firm birth in the formal sector but not in the informal sector. The evidence provided in the paper supports the structuralist theory.