IDEAS home Printed from https://ideas.repec.org/p/zbw/gigawp/307.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/171296/1/1001411412.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Asiedu, Elizabeth, 2002. "On the Determinants of Foreign Direct Investment to Developing Countries: Is Africa Different?," World Development, Elsevier, vol. 30(1), pages 107-119, January.
    2. Baron, David P. & Ferejohn, John A., 1989. "Bargaining in Legislatures," American Political Science Review, Cambridge University Press, vol. 83(4), pages 1181-1206, December.
    3. Vinaye D. Ancharaz, 2003. "Determinants of Trade Policy Reform in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(3), pages 417-443, September.
    4. Le, Quan Vu & Zak, Paul J., 2006. "Political risk and capital flight," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 308-329, March.
    5. Swenson, Deborah L., 1994. "The impact of U.S. tax reform on foreign direct investment in the United States," Journal of Public Economics, Elsevier, vol. 54(2), pages 243-266, June.
    6. Head, Keith & Ries, John, 1996. "Inter-City Competition for Foreign Investment: Static and Dynamic Effects of China's Incentive Areas," Journal of Urban Economics, Elsevier, vol. 40(1), pages 38-60, July.
    7. Sharma, Chanchal Kumar, 2017. "A Situational Theory of Pork-Barrel Politics: The Shifting Logic of Discretionary Allocations in India," GIGA Working Papers 298, GIGA German Institute of Global and Area Studies.
    8. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September.
    9. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    10. Steven Cassou, 1997. "The link between tax rates and foreign direct investment," Applied Economics, Taylor & Francis Journals, vol. 29(10), pages 1295-1301.
    11. Sharma, Chanchal Kumar, 2015. "Re-imagining Federalism in India: Exploring the Frontiers of Collaborative Federal Architecture," MPRA Paper 64325, University Library of Munich, Germany, revised 14 Feb 2015.
    12. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Wiley Blackwell, vol. 54(1), pages 89-113.
    13. Norman Schofield, 1976. "The kernel and payoffs in European government coalitions," Public Choice, Springer, vol. 26(1), pages 29-49, June.
    14. David Brady & Michael Spence, 2010. "Leadership and Growth : Commission on Growth and Development," World Bank Publications, The World Bank, number 2404, June.
    15. Sharma, Chanchal Kumar, 2010. "Beyond Gaps and Imbalances: Re-Structuring the Debate on Intergovernmental Fiscal Relations," MPRA Paper 32145, University Library of Munich, Germany.
    16. Cai, Hongbin & Treisman, Daniel, 2004. "State corroding federalism," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 819-843, March.
    17. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August.
    18. Vernon Henderson, 2002. "Urbanization in Developing Countries," World Bank Research Observer, World Bank Group, vol. 17(1), pages 89-112.
    19. Nalini Kant Jha, 1999. "Foreign Policy Making in Federal States : The Indian and Canadian Experiences," India Quarterly: A Journal of International Affairs, , vol. 55(3-4), pages 1-16, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    foreign direct investment; foreign policy; India; intergovernmental relations; economic growth;

    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 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid
    • P45 - Economic Systems - - Other Economic Systems - - - International Linkages
    • P48 - Economic Systems - - Other Economic Systems - - - Political Economy; 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:gigawp:307. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - Leibniz Information Centre for Economics). General contact details of provider: http://edirc.repec.org/data/dueiide.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.