Discrimination or Social Networks? Industrial Investment in Colonial India

Industrial investment in colonial India was segregated by the export industries, such as tea and jute that relied on British firms and the import substituting cotton textile industry that was dominated by Indian firms. Empirical evidence in this article does not suggest that barriers to entry faced by Indian entrepreneurs created this separation. Informational asymmetry played an important role. British entrepreneurs knew the export markets and the Indian entrepreneurs were familiar with local markets. Conditional on the initial advantage in entry, social network effects determined subsequent entry of firms by ethnicity and created separate spheres of industrial investment.