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

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