Social fragmentation, technology adoption and productivity in colonial India

In this paper, we examine the role of social environment on the choice of technology and firm productivity using the case of textile mills in twentieth century India. During the twentieth century, Indian textile mills continued using the British mule technology while textile firms in most of the countries moved to the American ring technology. Indian textile mills were also known for lower productivity than the contemporary British, American, or Japanese mills. While most of the existing studies offered explanations for both these phenomenon by directly making cross-country comparisons, we seek to explain productivity differences and choice of mule technology using firm level data from the textile sector in the twentieth century India. Drawing on the existing literature on this issue, we argue that generating tacit knowledge was critical for technology adoption. The process of tacit knowledge creation depended on exchange of knowledge and ideas at the social level and therefore, is a function of demographic factors and ethnic composition of the society. In our paper, we combine input-output data from colonial textile firms with city level demographic characteristics in colonial India and estimate the effect of age structure, religious composition, and caste fragmentation on choice of technology and firm level productivity. We find that textile mills located in fragmented societies faced less social inertia against changing the technology and therefore, the degree of transition to the American technology was higher in those mills. We also find that the ethnic identities of the managing agents played critical roles in technological transition. Besides caste fragmentation, overall literacy rate and English literacy also influenced productivity and technology adoption.