Urbanisation and development are tightly linked. Developing countries are urbanising at a much faster pace than developed countries. For instance, China’s and India’s economic transformation and urbanisation is happening at 100 times the scale of the first country in the world to urbanise—the UK—and in just one-tenth of the time.
This debate is, in many respects, a very old question dating back to Alfred Marshall and Jane Jacobs. Marshall (1890) established the field of agglomeration and the study of clusters by noting the many ways in which similar firms from the same industry can benefit from locating together. Glaeser et al (1992) famously described how Marshall-Arrow-Romer type externalities predict that spillovers come from within industries, especially when concentration is high, and can lead to local job growth. Porter (1990) also holds that spillovers emerge from within industries, but only in the presence of competition. Jacobs (1969), on the other hand, pushed back against these perspectives—she emphasised how knowledge flows across industries, and that industrial variety and diversity are conducive to growth. While these issues have been widely discussed over the past two decades, our understanding of their practical application to an environment like India is very limited.
In a recent research paper, we measure specialisation and diversity for the manufacturing and services sectors in India and compare it to the US (Ghani et al 2014). Services have been very important for India’s development, and notions of local specialisation and diversity extend well beyond the manufacturing sector. We use establishment-level data that comes from the economic censuses of India (e.g. Annual Survey of Industries, National Sample Survey).
The specialisation index identifies the degree to which one industry is concentrated in a district compared to the nation as a whole—for example, a district may draw 10% of its employment from a single industry that nationally accounts for only 1% of India’s employment. The specialisation metric quantifies the largest such deviation for a district.
The diversity index considers the district’s industrial composition as a whole. It asks, looking across all of the industries for a district, the overall degree to which the district resembles India as a whole. A highly diversified district contains an industrial structure that is similar to India’s overall employment distributions nationally.
Indices on specialisation and diversification are related to each other but not redundant. The two indices measure different things—specialisation captures extreme concentration of one