Regional concentration of firms has several effects on the development of firms. While theories point out different relationships between firm’s efficiency and regional concentration, this study analyzes such relationships for nine Indian manufacturing industries located in 17 Indian states using Data Envelopment Analysis (DEA) and the Tobit model. Results on efficiency show that technical efficiency is better than allocative efficiency, indicating betterment of technology and at the same time excess use of resources in Indian industries. Besides, regional concentration of industries is found to have a negative relationship with efficiency, which supports the ‘Quiet Life Hypothesis’ of Hicks. Tobit analysis also shows the prevalence of negative relations between efficiency and concentration in Indian industries. Just-in-time management of inventories could be encouraged and measures to see that this is successful in industries should be the aim of reforms.

New trade theory approach explains regional growth to be based on the proposition that firm’s location is influenced by the existence of economies of scale, barriers to trade and agglomeration economies. The interaction of these three factors is said to determine the geographical distribution of the industry. Besides, the industries located in different regions are said to play a major role in the development of the region. This is clear from the words of Kaldor (1967) that industry is seen as the main ‘engine of growth’. However, with studies pointing out a positive relationship between size of firms, profits and their efficiency (Demsetz, 1973)1, and a negative relationship between concentration of firms and their efficiency (Gumbau-Albert and Maudos, 2002), the link between regional productivity of industry, efficiency in production and agglomeration economies is a matter of concern in regional economics. Though there have been a number of studies on regional productivity analysis, regional concentration of industry and the influence of local factors, there are only a few works which link industrial location, concentration and economic efficiency of regions. The prominent among them is that of Bannister and Stolp (1995), where the authors explore the link between regional concentration, industry location and economic efficiency in the manufacturing industries of Mexico. Besides, while Gumbau-Albert and Maudos (2002) deal with the relation between efficiency of firms and various determinants of efficiency in a study on Spanish industry, Setiwan et al. (2012) investigate the relationship between technical efficiency and regional concentration in Indonesian food and beverage sectors using firm-level data. Added to these, it is found that while Beeson and Husted (1989) study the relationship between productive efficiency in US manufacturing sector and the regional differences in labor, urbanization and industrial structure, Patibandla (1998) studies the link between production efficiency, organizational behavior and structural conditions of large and small firms in the Indian context. There are other studies like that of Driffield and Kambhampati (2003) and Bhaumik and Kumbhakar (2010), which deal with an indirect relation between manufacturing efficiency and its determinants. Besides these, there are other works which relate to total factor productivity growth and agglomeration without involving efficiency.

Applied Economics Journal, Concentration and Efficiency, Indian Manufacturing, A Regional Study