• FDI and growth

FDI and growth

This paper addresses two major issues related to foreign direct investment and regional development in India’s post-reform period – spatial distribution of FDI and the relationship between FDI and economic growth. Based on the analysis of a new and detailed database on FDI approval since the 1990s, the paper argues that FDI is likely to increase India’s regional disparity.

The main findings of the paper include:

• the concentration of FDI in a few relatively advanced regions may have prevented FDI effects from spreading across the Indian economy
  
• although there is a positive correlation between FDI and economic growth across Indian states, it is only in relatively rich states that a higher FDI intensity is associated with significantly high growth rate
  
• FDI does not appear to be a decisive factor for growth of less advanced states
  
• foreign investors in India strongly prefer locations that are relatively advanced in terms of per capita income and infrastructure
  
• states whose endowment of skilled workers is particularly poor may face more difficulties in attracting foreign investment
  
• FDI is heavily concentrated even within Indian states. Typically, three most attractive districts in a state account for more than two third of all FDI projects located in the state as a whole
  
• growth promoting spill-over of FDI to local companies and workers tend to be relatively weak in the primary sector

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