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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues by
the Vale Columbia Center on Sustainable International Investment
No. 118 March 31, 2014
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Shawn Lim ([log in to unmask])
*Regional concentration of FDI involves trade-offs in post-reform
India*
by
Peter Nunnenkamp, Wan-Hsin Liu and Frank Bickenbach
*<#1453c68e22c6b669_14522e53184d4c61__ftn1>
P. Chidambaram, India’s Minister of Finance, claimed that “FDI worked
wonders in China and can do so in
India.”[1]<#1453c68e22c6b669_14522e53184d4c61__ftn2>However, China’s
example may also point to the limitations of foreign
direct investment (FDI) liberalization in promoting the host country’s
economic development. FDI in China is heavily concentrated in the coastal
areas, and previous studies have suggested that this has contributed to the
increasing disparity in regional income and growth since the late 1970s.
The regional concentration of FDI tends to go hand in hand with
agglomeration of economic activity in general and, presumably, domestic
investment as well. Conversely, FDI-related spillovers, which are crucially
important in order for FDI to have positive effects on growth, have a
spatial dimension—i.e., their impact weakens with distance.
Against this backdrop, we systematically assessed the concentration of FDI
in Indian districts by drawing on (unpublished) data from the Ministry of
Commerce and Industry on projects approved during the 1991-2005 period.
While some approved projects may not have been realized, the number of
projects is probably much less inflated than approved FDI amounts. In
addition to FDI in the strict sense, the dataset also covers technology
licensing (so-called technical cases) and projects undertaken by
non-resident Indians (NRIs).
We found that the regional concentration of projects, as measured by the
overall Theil index,[2]
<#1453c68e22c6b669_14522e53184d4c61__ftn3>increased continuously since
the start of FDI liberalization in the early
1990s. Decomposing the index reveals several sources of growing
concentration. Perhaps most surprisingly, the share of districts that did
not receive any projects within a three-year interval (the extensive margin
of concentration) rose from 57% in 1993-95 to 74% in 2002-04, even though
the total number of projects was considerably higher in more recent
intervals. Simultaneously, the number of projects increasingly grew more
concentrated across districts that received at least one project (intensive
margin). Furthermore, inequality widened between the average number of
projects of the top six districts (Mumbai, Delhi, Bangalore, Chennai, Pune,
Hyderabad) and the districts with fewer projects.
The share of projects going to the top six districts rose from 31% to 77%.
This is most probably because these metropolitan areas are attractive in
several dimensions.[3] <#1453c68e22c6b669_14522e53184d4c61__ftn4> Their
per-capita income exceeds the average per-capita income of their respective
states by 27% to 136% in 2004/05. The literacy rate is 15 to 20 percentage
points higher than the average in India. The top districts also stand out
in terms of financial and communication infrastructure.
Comparing the levels of concentration for different types of projects, we
generally found the lowest concentration for technology licensing and the
highest concentration for FDI projects with majority foreign ownership
shares. What the different types of projects have in common, however, is
that concentration rose over time.
The level of concentration also varied considerably across major home
countries of FDI. On the one hand, it was clearly above average for
projects from the United States and, more surprisingly, for projects from
the group of Southeast Asian neighbors. On the other hand, the level was
relatively low for projects from the group of European Union (EU)
countries, and particularly for projects undertaken by NRIs. The difference
between the United States and the EU may possibly be attributed to the
focus of United States firms on services (particularly in IT), while EU
firms engaged more strongly in
manufacturing.[4]<#1453c68e22c6b669_14522e53184d4c61__ftn5>The
particularly low concentration of NRI projects is probably due to NRIs
being more familiar with local conditions in relatively remote districts.
Importantly, however, the development over time was strikingly similar for
all major sources: concentration grew substantially.
Regarding policy implications, Indian policymakers may be tempted to
conclude from the different levels of concentration among types and sources
of FDI that India’s earlier reluctance to allow wholly foreign-owned
subsidiaries and its selective approval procedures prior to the reforms in
the early 1990s were well-founded and could have helped to spread
FDI-related benefits beyond a few economic centers. However, such a
conclusion would be premature. With respect to the types of projects,
foreign partners may hesitate to transfer up-to-date technology unless they
hold majority ownership. Indian policymakers should consider that this
involves a trade-off between higher overall potential and wider regional
spread of FDI-related technological spillovers. With respect to the sources
of FDI, the extent to which differences in sectoral focus actually
contribute to variations in the level of concentration remains an open
question. Further research is required to assess the importance of foreign
investors’ experience of operating in India when it comes to making
location choices. Indian policymakers may be best advised to allow for all
types and sources of FDI and use non-discriminatory means of regional
policy to promote investment in remote districts.
------------------------------
* <#1453c68e22c6b669_14522e53184d4c61__ftnref1> Peter Nunnenkamp (
[log in to unmask]), Wan-Hsin Liu ([log in to unmask]) and
Frank Bickenbach ([log in to unmask]) are senior researchers in
the International Economy and International Economic Policy research
program at the Kiel Institute for the World Economy. This *Perspective* is
based on Frank Bickenbach, Wan-Hsin Liu and Peter Nunnenkamp, “Regional
concentration of FDI in post-reform India: A district-level analysis”
(Kiel: Institute for the World Economy, 2013), which also references
literature that supports various points made in this *Perspective*. The
authors are grateful to Padma Mallampally, Premila Nazareth and Indira
Rajaraman for their helpful peer reviews. *The views expressed by the
authors of this Perspective do not necessarily reflect the opinions of
Columbia University or its partners and supporters. Columbia FDI
Perspectives** (ISSN 2158-3579) is a peer-reviewed series.*
[1] <#1453c68e22c6b669_14522e53184d4c61__ftnref2>* Indian Express*,
November 11, 2005.
[2] <#1453c68e22c6b669_14522e53184d4c61__ftnref3> The Theil index is a
statistic frequently used in economics to measure inequality or
concentration. It is a special case of the generalized entropy index.
[3] <#1453c68e22c6b669_14522e53184d4c61__ftnref4> A recent study found that
metropolitan areas showed a strongly positive correlation with FDI at the
district level. *See* Rajesh Chakrabarti et al., “Infrastructure and FDI:
Evidence from district-level data in India,” available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712185.
[4] <#1453c68e22c6b669_14522e53184d4c61__ftnref5> This is revealed by a
sector classification of projects by the authors.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “Peter Nunnenkamp, Wan-Hsin Liu and Frank
Bickenbach, ‘Regional concentration of FDI involves trade-offs in
post-reform India,’ Columbia FDI Perspectives, No. 118, March 31, 2014.
Reprinted with permission from the Vale Columbia Center on Sustainable
International Investment (www.vcc.columbia.edu
<http://www.vcc.columbia.edu>).” A copy should kindly be sent to the Vale
Columbia Center at [log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Vale Columbia Center on Sustainable
International Investment, Shawn Lim, [log in to unmask] or
[log in to unmask]
The Vale Columbia Center on Sustainable International Investment (VCC), a
joint center of Columbia Law School and the Earth Institute at Columbia
University, is a leading applied research center and forum dedicated to the
study, practice and discussion of sustainable international investment. Our
mission is to develop and disseminate practical approaches and solutions,
as well as to analyze topical policy-oriented issues, in order to maximize
the impact of international investment for sustainable development. The
Center undertakes its mission through interdisciplinary research, advisory
projects, multi-stakeholder dialogue, educational programs, and the
development of resources and tools. For more information, visit us at
www.vcc.columbia.edu<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=7744ff5fdd&e=dd153d6a25>
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*Most recent Columbia FDI
Perspectives*<http://columbia.us6.list-manage.com/track/click?u=ab15cc1d53&id=2040cff426&e=dd153d6a25>
- No. 117, Rudolf Adlung, “Multilateral investment disciplines: Don’t
forget the GATS!” March 17, 2014.
- No. 116, Gary Hufbauer and Sherry Stephenson, “The case for a
framework agreement on investment,” March 3, 2014.
- No. 115, Joachim Karl, “The ‘spaghetti bowl’ of IIAs: The end of
history?” February 17, 2014.
- No. 114, Louis T. Wells, “Government-held equity in foreign investment
projects: Good for host countries?” February 3, 2014.
- No. 113, Anthea Roberts, “Recalibrating interpretive authority,”
January 20, 2014.
*All previous FDI Perspectives are available at *
*http://www.vcc.columbia.edu/content/fdi-perspectives*<http://columbia.us6.list-manage1.com/track/click?u=ab15cc1d53&id=ba2da3f44c&e=dd153d6a25>
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Vale Columbia Center on Sustainable International Investment
Columbia Law School - Earth Institute
Columbia University
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Ph: (212) 854-0689
Fax: (212) 854-7946
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The Yearbook on International Investment Law and Policy 2011-2012 was
released by Oxford University Press in January 2013. For details please see
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The following ebooks are available free of charge from the same website:
FDI Perspectives: Issues in International Investment, Inward and Outward
FDI Country Profiles, MNEs from Emerging Markets: New Players in the World
FDI Market.
*Copyright © 2014 Vale Columbia Center on Sustainable
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