A Study of regional determinants of foreign direct investments in India, and the case of Gujarat

Abstract

We discuss the determinants of FDI over the regions of a large economy like India, and develop a framework drawn from the advantage concept of Kindleberger and from location theories rooted in regional science. We specifically use 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. We apply the same to the situation in India of large FDI flows since the reform began in 1991-92 to arrive at a tentative explanation of the regional patterns of FDI. Essentially we argue that for all investments (other than those strictly confined to locations due to their requirements of either natural resources or the need to be very close to markets) 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.