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A Study of the Regional Determinants of Foreign Direct Investments in India, and the Case of Gujarat

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  • Morris, Sebastian

Abstract

We discuss the determinants of FDI over the regions of a large economy like India, and develop a framework drawn from the advantage concept of Kindleberger and from location theories rooted in regional science. We specifically use Stephen Hymer’s understanding of the parallels and relationship between the international organisation of a global firm and the locational choices for the same with the spatial aspects of location of economic activities in general. We apply the same to the situation in India of large FDI flows since the reform began in 1991-92 to arrive at a tentative explanation of the regional patterns of FDI. Essentially we argue that for all investments (other than those strictly confined to locations due to their requirements of either natural resources or the need to be very close to markets) it is the regions with metropolitan cities, that have the advantage in ‘headquartering’ the country operations of MNCs in India, that therefore attract the bulk of FDI. Even more than the quantum of FDI, the number of cases of FDI, as also the employment effects, and spillover effects are large for such regions. Empirical support for this hypothesis is provided by a study of the foreign investment intentions, and the distribution of investment projects. Gujarat has been particularly handicapped in not having a large and metropolitan city unlike the southern states which have Bangalore, and Hyderabad besides the older metropolis of Chennai. The area around Delhi, and Maharashtra its two metropolitian cities - Mumbai and Pune, have large advantage. Adjusting for these factors the FDI into Gujarat was large enough over the period when the state had grown rapidly in the first six years following the reform of 1991-92. Since then the slow down of the growth has been a retardant to FDI since the kind of FDI that Gujarat can hope for are largely industrially oriented. Similarly regulatory uncertainty especially with regard to gas, but also electric power and more generally in the physical infrastructure sectors had hurt Gujarat more than other states. We conclude by suggesting that there are vast gains to be made by attracting FDI, especially in services, high tech, and skilled labour seeking industries, because then the resulting operations are more externally oriented, and the investments arise from competing firms. Gujarat therefore needs to worry about these investments can come about. Its fortunes are likened very closely with the growth of manufacturing in the country as a whole.

Suggested Citation

  • Morris, Sebastian, 2004. "A Study of the Regional Determinants of Foreign Direct Investments in India, and the Case of Gujarat," IIMA Working Papers WP2004-03-07, Indian Institute of Management Ahmedabad, Research and Publication Department.
  • Handle: RePEc:iim:iimawp:wp01805
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    References listed on IDEAS

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    1. Morris, Sebastian, 1997. "Why Not Push for 9% Growth?," IIMA Working Papers WP1997-04-01_01440, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Dunning, John H, 1979. "Explaining Changing Patterns of International Production: In Defence of the Eclectic Theory," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 41(4), pages 269-295, November.
    3. Basant, Rakesh, 1999. "Corporate Response to Economic Reforms in India," IIMA Working Papers WP1999-06-04, Indian Institute of Management Ahmedabad, Research and Publication Department.
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    Cited by:

    1. Morris, Sebastian, 2007. "Role of Trade and Macroeconomic Policies in the Performance of Special Economic Zones (SEZs)," IIMA Working Papers WP2007-09-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    2. Shruti Sharma, 2018. "Does Plant Size Matter? Differential Effects of Foreign Direct Investment on Wages and Employment in Indian Manufacturing," Asian Development Review, MIT Press, vol. 35(1), pages 52-80, March.
    3. Massimo Cortili & Alessia Pisoni & Alberto Onetti, 2012. "The internationalization of Italian firms in India: some empirical evidences," Economics and Quantitative Methods qf1202, Department of Economics, University of Insubria.
    4. Kayam, Saime Suna & Ecer, Sencer & Gupta, R, 2011. "Social determinants of intra-regional dispersion of FDI in India," MPRA Paper 39153, University Library of Munich, Germany.
    5. Ramasamy Murugesan & Murugesan Poovendhan, 2016. "Analysis of factors determining the inward FDI in top seven Indian states from top seven source countries using gravity model," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(3), pages 209-230.
    6. Dr. Kavita Saxena, 2014. "An Evaluation of Foreign Direct Investment in India," Journal of Commerce and Trade, Society for Advanced Management Studies, vol. 9(2), pages 96-100, October.
    7. Tripathi, Sabyasachi & Kumar, Shamika, 2016. "Determinants of firm location choice in metropolitan cities in India: A binary Logit model analysis," MPRA Paper 73995, University Library of Munich, Germany.
    8. Jagannath Mallick, 2013. "Private investment in India: regional patterns and determinants," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 51(2), pages 515-536, October.
    9. Sabyasachi TRIPATHI & Shamika KUMAR, 2017. "Determinants Of Firm Location Choice In Large Cities In India: A Binary Logit Model Analysis," Theoretical and Empirical Researches in Urban Management, Research Centre in Public Administration and Public Services, Bucharest, Romania, vol. 12(3), pages 45-62, April.
    10. Tushar Ranjan Panigrahi & Sunita Mall, 2017. "Relationship Between Fdi Distribution And Regional Economic Aggregates: An Evidence From India," Romanian Economic Business Review, Romanian-American University, vol. 12(4), pages 109-124, december.

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