Title

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

Document Type

Article

Publication Title

South Asia Economic Journal

Publication Date

3-1-2012

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. © 2012 Research and Information System for Developing Countries & Institute of Policy Studies of Sri Lanka.

Volume

13

Issue

1

First Page

27

Last Page

50

DOI

10.1177/139156141101300102

ISSN

13915614

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