The paper discusses the determinants of FDI over the regions of a large economy like India, using the framework drawn from the advantage concept of Kindleberger and from location theories rooted in regional science. It specifically uses 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 and applies the same to the situation in India of large FDI flows since the reform began in 1991-92 in order to arrive at a tentative explanation of the regional patterns of FDI. Essentially, the paper argues that for all investments, 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. Looking at the case of Gujarat, which has been particularly handicapped in not having a large and metropolitan city unlike the southern states, there is evidence of slow down of growth since 1997. This slow 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. In conclusion, the paper suggests 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.
A Study Of The Regional Determinants Of Foreign Direct Investments In India, And The Case Of Gujarat
Author : Sebastian Morris