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Research awards

ESRC funded project:

Risk, Information and Capital Flows: The Rise of Modern Industries in Colonial India
(September 2002-August 2004)

Non technical summary:

What determines capital from flowing across borders when wage rates differ, even when political uncertainties do not exist. Colonial India is an interesting contest to explore this question. This was the period of the rise of modern industry using both British and indigenous capital. The project will analyse industrial investment in the first half of the twentieth century, focusing on the problems of risk, moral hazard and asymmetric information.

Indian industry had several unique features: it was one of the first instances of long-distance international direct investment in manufacturing. The capital was raised in Britain and in India from the expatriates. Both can be considered as British investment. The management of these industrial firms was conducted by specialist firms, the managing agents. The managing agent held shares in the company, but did not often have majority control. A typical managing agent supplied management services to several firms, spanning the major industries. British investment in the export industries in Eastern India was drawn not only from investors in Britain, but also from expatriates living in India. The managerial responsibility of this investment, whatever its origin, rested with the British managing agency firms. In contrast, the industry that developed in western India was cotton textiles, which was an import substituting activity. This sector drew its capital predominantly from the hinterland. Indian merchants who were familiar with local trade networks diversified into production of cotton textile products to be sold in the domestic market

My hypothesis is that investment flows were influenced by the extent of knowledge that investors had of particular markets. British investors preferred to invest in export industries, while Indian capital stayed confined to familiar domestic markets. Group effect was a key determinant of industrial investment in India. The managing agency system, which became the dominant form of industrial organization in India, was an institutional innovation that addressed the problems of moral hazard in long distance investment.

Finally, I shall also look at the implications of the managing agency system for the rent seeking activities pursued by industry in the colonial period. In the 1930s, export industries sought to restrict output in order to protect prices, while industries catering to the domestic market sought protective tariffs. Interest group activity had a more important role in industrial development in colonial India than has been suggested in the literature.

Research Output

  • Work and Efficiency in Indian Cotton Mills: Worker Resistance or Entrepreneurial Failure?
  • Risk, Information and Capital Flows: The Industrial Divide between British and Indian Business.
  • New estimates of Industrial Investment in Colonial India
  • The Conflict between Foreign and Domestic Capital: Economic De-colonization of India.