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Infrastructure and FDI: Evidence from district-level data in India

Author

Listed:
  • Rajesh Chakrabarti

    (Indian School of Business,Hyderabad)

  • Krishnamurthy Subramanian

    (Indian School of Business,Hyderabad)

  • Sesha Meka

    (Indian School of Business,Hyderabad)

  • Kuntluru Sudershan

    (Indian Institute of Management, Kozhikode)

Abstract
Though public infrastructure – physical and financial – is widely believed to play a critical role in attracting Foreign Direct Investment (FDI), identifying this effect remains a challenge. In this paper, we use unique data to identify this effect by exploiting purely cross-sectional variation among approximately 600 districts in India. We examine the effect of infrastructure in 2001 on cumulative FDI flows into the district during 2002-07. Using panel regressions that include state fixed effects, we employ a two-pronged identification strategy. First, we test by netting out average (and maximum) FDI inflows into surrounding districts. Second, we exploit variation among different sectors within a district depending upon the sector’s propensity to attract FDI. Since our variables vary primarily at the district level, these tests together control for all omitted variables at the district level. Surprisingly, we find that FDI inflows remain insensitive to changes in infrastructure till a threshold is reached; thereafter, FDI inflows increase steeply with an increase in infrastructure.

Suggested Citation

  • Rajesh Chakrabarti & Krishnamurthy Subramanian & Sesha Meka & Kuntluru Sudershan, 2013. "Infrastructure and FDI: Evidence from district-level data in India," Working papers 130, Indian Institute of Management Kozhikode.
    • Handle: RePEc:iik:wpaper:130
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    References listed on IDEAS

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    Keywords

    Infrastructure; FDI; India; District;
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