Market integration, demand, and the growth of firms: Evidence from a natural experiment in India

In many developing countries, the average firm is small, does not grow, and has low productivity. Lack of market integration and limited information on non- local products often leave consumers unaware of the prices and quality of non- local firms. They therefore mostly buy locally, limiting firms' potential market size (and competition). We explore this hypothesis using a natural experiment in the Kerala boat- building industry. As consumers learn more about non- local builders, high-quality builders gain market share and grow, while low-quality firms exit. Aggregate quality increases, as does labor specialization, and average production costs decrease. Finally, quality- adjusted consumer prices decline.