Discrimination or Social Networks? Industrial Investment in Colonial India

Industrial investment in Colonial India was segregated by the export oriented industries, such as tea and jute that relied on British firms and the import substituting cotton textile industry that was dominated by Indian firms. The literature emphasizes discrimination against Indian capital. Instead informational factors played an important role. British entrepreneurs knew the export markets and the Indian entrepreneurs were familiar with the local markets. The divergent flows of entrepreneurship can be explained by the comparative advantage enjoyed by social groups in information and the role of social networks in determining entry and creating separate spheres of industrial investment. 1 My debt is to V. Bhaskar for many discussions to formalize the arguments in the paper. I thank, Wiji Arulampalam, Sacsha Becker Nick Crafts and the anonymous referees for helpful suggestions and the participants at All UC Economic History Meeting at Caltech, ESTER Research Design Course at Evora and Economic History Workshop at Warwick for comments. I am grateful to the Economic and Social Research Council, UK, for support under research grant R000239492. The errors are mine alone.