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Federalism and Foreign Direct Investment: How Political Affiliation Determines the Spatial Distribution of FDI – Evidence from India

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  • Sharma, Chanchal Kumar
Abstract
This paper links the foreign economic engagement of India's states with the literature on federalism, thereby contributing to an understanding of the political economy of FDI inflows in a parliamentary federal system. More specifically, it studies subnational governments' international engagements to attract foreign direct investment (FDI) and investigates whether the political affiliations of states' chief ministers and parliamentarians determine the spatial distribution of FDI across the Indian states, correcting for the influence of per capita income, population density, urbanisation, infrastructure, policy regime, and human development. Although the central government plays no direct role in determining the state to which FDI goes, the centre-state relations in a federal structure play a role in creating perceptions about the relative political risk involved in different investment destinations. Employing multiple linear regressions to analyse time-series (2000-2013) cross-sectional (12 states) data using the panel procedure, the study finds that affiliated states attract relatively more FDI per capita in comparison to states ruled by opposition parties or coalition partners. However, some exceptions do result, primarily due to two phenomena: first, the presence of a strong state leadership and, second, the presence of a significant share of members of parliament belonging to the prime minister's party in the non-affiliated states. Further, states ruled by outside supporters have been most successful in attracting FDI inflows during the coalition period.

Suggested Citation

  • Sharma, Chanchal Kumar, 2017. "Federalism and Foreign Direct Investment: How Political Affiliation Determines the Spatial Distribution of FDI – Evidence from India," GIGA Working Papers 307, GIGA German Institute of Global and Area Studies.
    • Handle: RePEc:zbw:gigawp:307
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    References listed on IDEAS

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    Cited by:

    1. Ramachandran, Renjith & Sasidharan, Subash & Doytch, Nadia, 2020. "Foreign direct investment and industrial agglomeration: Evidence from India," Economic Systems, Elsevier, vol. 44(4).

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    More about this item

    Keywords

    foreign direct investment; foreign policy; India; intergovernmental relations; economic growth;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • P33 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid
    • P45 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - International Linkages
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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