Toward a Microeconomics of Growth

What drives growth at the microeconomic
level? The authors divide the factors that determine a
location's growth performance into two groups,
"1st advantage" and "2nd advantage." The
term 1st advantage refers to the conditions that provide the
environment in which new activities can be profitably
developed, including most of the factors on which
traditional theory has focused, such as access to inputs
(labor and capital), access to markets, provision of basic
infrastructure, and the institutional environment. The term
2nd advantage refers to factors that increase returns to
scale and can lead to cumulative causation processes. They
may be acquired by learning, through technological
spillovers, or by the development of thick markets of
suppliers and local skills. The authors' analysis
suggests that empirical investigation of the drivers of
growth must shift down to a more microeconomic level. Such
an analysis has become more feasible as data at the
subnational level have become more available. By viewing
recent empirical evidence on drivers of growth through their
analytical framework, the authors are able to begin to
sketch out a microeconomic agenda for growth. They
emphasize that it is the manner in which 1st and 2nd
advantages interact that shapes the pattern of development.
The authors then turn to the example of how policy
has affected manufacturing growth performance in India.
They analyze links between the direction of state-level
labor regulation and growth in the organized manufacturing
sector, how state-led expansion of bank branches into rural
areas has affected unregistered or informal manufacturing,
and how the pre-reform technological capability of
industries affected their response to liberalization in
1991. The analysis suggests that policy choices at the
local level affect growth. Both theory and empirics need to
downshift to the microeconomic level if we are to make
advances in identifying specific means of encouraging
innovation and growth.