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All Foreign Direct Investment Is Local: Indian Provincial Politics and the Attraction of FDI

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  • Travis G. Coan
  • Tadeusz Kugler

Abstract

This study focuses on the differences between Indian states in terms of banking infrastructure, size of the economic market and most importantly provincial-level political capacity that creates the pull of foreign direct investment (FDI). While the majority of the extant empirical literature examines national-level data, few studies analyze international capital formation at the provincial level and the dynamics of sub-national political capacity—that is, where allocations are made and policies are implemented. This study corrects for this deficiency. Using data at the provincial level in India over the period 2000–2005, we find an inverted-U-shaped relationship between provincial capacity and FDI, suggesting the presence of a critical point at which additional extractive capabilities have negative implications for foreign capital accumulation. The results suggest a number of important policy implications, allowing researchers to identify specific regions in which capacity is likely to facilitate investment, while also providing a political–economic model to better-forecast changes in investment at the sub-national level in India. JEL: R50, R12, P16, O16, N45, H70, H81, H11

Suggested Citation

  • Travis G. Coan & Tadeusz Kugler, 2012. "All Foreign Direct Investment Is Local: Indian Provincial Politics and the Attraction of FDI," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 13(1), pages 27-50, March.
    • Handle: RePEc:sae:soueco:v:13:y:2012:i:1:p:27-50
    DOI: 10.1177/139156141101300102
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    More about this item

    Keywords

    FDI; India; gross domestic product;
    All these keywords.

    JEL classification:

    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • N45 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Asia including Middle East
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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