How much do changes in the fragmentation of production contribute to growth? Using detailed plant-level data on the manufacturing sector in India between 1990 and 2014, we study Smithian growth, the link between greater fragmentation of production and productivity. We propose a measure of a plant’s vertical span, which corresponds roughly to the number of stages in a supply chain that the plant performs in-house; when plants have smaller vertical spans, production is more fragmented. We find that fragmentation increases with development in both the cross-section and time series. Further, within locations at a point in time, larger plants tend to have smaller vertical spans, and those that increase sales tend to decrease vertical span. Using changes in demand during the tariff liberalization in the 1990s, we provide evidence that increased size causes specialization. We find evidence from economies of scale in specialization. A model serves to rationalize these findings and as a basis for quantitative work.
With Ezra Oberfield (Princeton)