India’s manufacturing push is increasingly framed around trade policy, incentives, and logistics. These matter, but they do not explain why some firms become globally competitive while others stall.
This gap is not due to lack of exposure. More than half of Indian firms – 52.6 percent – are already part of global value chains (GVCs). The question is why only some convert access into sustained productivity gains.
Participation creates opportunity, but not capability. Firms must meet the demands of global production consistently, maintaining quality, coordinating across networks, and adapting.
That capability is shaped by the conditions firms operate in every day. Cities that offer reliable education, healthcare, finance, and basic services tend to host firms that are both more productive and better integrated with global production networks.
Cities as Part of the Production System
Urban amenities are part of the production system itself. Education shapes labour quality, healthcare affects reliability, and finance determines how firms expand or absorb shocks. Even less visible features such as public spaces or local connectivity help attract and retain the workers modern production depends on.
These effects are not immediate. Individual improvements rarely transform firm performance on their own. A factory does not double its output because a new college opens nearby. But over time, firms in better-served districts operate more consistently – finding skilled workers faster, accessing credit with fewer frictions, and managing disruptions better. That edge compounds.
Marginal advantages accumulate into persistent differences across places. Districts with stronger ecosystems host firms that are more productive and better able to sustain performance. Those without them struggle to convert similar resources into comparable outcomes.
Why Global Integration Rewards Capability
Global integration does not just reward efficiency; it penalises inconsistency. Firms in global value chains must perform reliably within tightly coordinated networks, where delays or variation carry immediate costs.
Competition therefore shifts. It is not enough to be cost-effective; firms must be consistently capable. Global production systems act as a filter, retaining firms that sustain performance and excluding those that don’t.
In this setting, local environments become decisive. Firms in stronger ecosystems are more likely to remain integrated and perform well. Those in weaker ones struggle to meet the required standards. Access to global markets creates the opportunity, but local conditions determine whether firms can meet the demands that come with it.
This explains why firms facing similar international markets often show divergent outcomes. The constraint is not market access, but the ability to perform reliably within it.
Why Some Amenities Matter More
Analysis of data from the Fifth and Sixth waves of the Economic Census, and Town Directory of the Population Census 2011reveals that not all urban features contribute equally to firm performance. The strongest effects come from amenities that build human and organisational capability.
Education and healthcare stand out. Firms in districts with better access to schools, colleges, and medical facilities hire more effectively, retain workers longer, and operate with fewer disruptions. These are not abstract gains; they show up in lower disruptions, faster learning, and more consistent output. Cultural amenities, though less visible, support this process by attracting and retaining skilled workers.
Energy infrastructure is a basic constraint. Reliable power is essential for manufacturing; its absence quickly erodes other advantages.
By contrast, transport and financial access show more uneven effects. Their impact depends on whether firms operate in environments that can convert lower costs into sustained capability.
Where Urban Advantages Are Strongest
The effects of urban conditions vary across space. Firms in larger districts see stronger gains from similar improvements in amenities by about 2.8–3.2 percent, compared to 1.4–2.1 percent in smaller and medium districts.
Scale allows amenities to translate into matching and coordination gains. Larger cities support deeper labour markets, more specialised services, and denser networks, enabling firms to combine resources more efficiently.
Smaller districts face a different constraint. Financial access becomes binding. Even where other amenities exist, limited credit restricts firms’ ability to convert local conditions into growth.
Who Gains the Most
Urban advantages are uneven across firms. Amenities amplify firms that depend on capability rather than scale.
Smaller firms benefit disproportionately when they connect to global production networks. Local amenities offset limits of scale by improving access to skills, services, and coordination.
The gains are also stronger in technology-intensive industries. These sectors rely more on skilled labour, reliable infrastructure, and knowledge flows, and are therefore better positioned to convert local conditions into productivity gains. Lower-technology industries show weaker effects, suggesting amenities alone cannot overcome deeper structural constraints.
From Industrial Policy to Urban Systems
These patterns point to a blind spot in industrial policy. The focus remains on firm-level incentives and trade integration, while the conditions shaping firm performance receive less attention.
Policy effectiveness runs through local systems. Incentives do not operate in isolation; their impact depends on whether firms can draw on reliable education, healthcare, finance, and basic services. Where these are weak, gains are uneven and difficult to sustain. Where they are strong, the same instruments deliver more consistent outcomes.
Urban investments are therefore not parallel social spending; they are part of the productive base. A manufacturing strategy not matched by stronger local systems will produce uneven results.
The implications differ across space. Larger districts must deepen existing systems to exploit scale and network effects. Smaller and medium districts must close foundational gaps, especially in financial access and service delivery.
What is required is not new instruments, but better alignment. Urban and industrial policy act on the same firms through the same mechanisms, and should be designed together.
What Will Shape the Next Phase of Growth
The next phase of manufacturing growth will be determined less by entry into global markets and more by the environments that allow firms to remain competitive within them.
Many firms are already integrated into global value chains. What will differentiate outcomes is not participation, but the ability to sustain performance while meeting the demands of coordination, consistency, and adaptation.
Cities therefore matter not simply as sites of production, but as systems that determine how reliably and efficiently production takes place.
The question going forward is not only where factories are built, but whether the conditions around them allow firms to become more capable and competitive over time.