Region-wise spillover effects from Foreign Direct Investment (FDI) in India

Foreign Direct Investment (FDI) is considered as a key element in the industrial development of a nation. It brings capital inflow and contributes to the development of technology, managerial skills, and domestic firms. Multinational corporations (MNCs) possess superior knowledge, patents, trademarks, and exclusive technology which “spillover” to the host economy and benefit the domestic firms. Using a sample of inward FDI data from India, the empirical findings from a Pooled Ordinary Least Squares (OLS) regression indicate that equity inflow of FDI positively augments the regional Gross Domestic Product (GSDP). In addition, the industrial linkages have a positive impact on sectoral development; however, the impact of taxation is negative. Moreover, when we change the specification of our model by using the Limited Information Maximum Likelihood (LIML) regression with an instrument, we find that sustained economy like India has uneven distribution of FDI inflows and serves as a very good example of proximity concentration, intra-regional openness, and agglomerations. A decrease in geographic distance of 5.5 km from the regional headquarters increases the FDI inflow by approximately USD1Mil. We also find that the market size, infrastructure and labour conditions are key attributes in the spatial distribution of FDI inflow. Furthermore, we use a textual analysis framework with the news articles from Factiva database on the FDI policy. The Key Research Index conveys periodic changes in policy framework from the perspective of the investments in the early years, the growth of the FDI in the retail sector and the various sectoral benefits received from the FDI policies. The empirical findings strongly corroborate with the argument that industrial linkages between foreign and domestic firms aids industry agglomerations and spillovers to the host economy (Blomstrom et al., 2000; Gorg and Greenaway, 2002; Narula and Marin, 2005; Vacek, 2007). Our findings emphasises that lowering of taxes to encourage FDI is a major driver to stimulate regional attractiveness and it augments the revenues collected through taxes. In other words, the policy environment provides a breeding ground for flourishing of enterprises and thereby benefits the local economy and a decrease in geographical distance increases inflow of FDI. The quintessential findings from this research contributes in highlighting key recommendations for the policy makers and to the existing literature on spatial distribution of FDI Inflows and their spillovers in Emerging economies.