Networks, Migration and Investment: Insiders and Outsiders in Tirupur's Production Cluster

Abstract

This paper studies the effects of social network based lending. This is a pervasive phenomenon in most of the developing world. Access to such network capital has an obvious influence on investment. It also influences the pattern of migration since, ceteris paribus, migrants would prefer to be in locations where they have access to their community's lending network. We show that under reasonable conditions such lending will generate a rather specific pattern of migration and investment. In particular, migrants to locations where they do not have access to their community's lending networks will tend to have higher ability than the traditional residents of that location, but will invest less relative to their ability. Under some conditions this generates the possibility that migrants have higher ability but invest less in absolute terms than the local people. We test this implication using data from the knitted garment industry in the South Indian town of Tirupur. Comparing the growth rate of output (which, we argue, proxies well for ability) with investment between garment firms owned by migrants to Tirupur and local people, we find that local people have slower output growth but invest substantially more at all levels of experience. We also find a positive correlation between investment and growth within any single community, consistent with the view that capital access does not vary within each group.