Localization of FDI flows: Evidence on Infrastructure as a Critical Determinant

Subramanian, K and Chakrabarti, R and Meka, S (2011) Localization of FDI flows: Evidence on Infrastructure as a Critical Determinant. Working Paper. SSRN. (Unpublished)

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Abstract

The localization of Foreign Direct Investment (FDI) to a few economies represents a puzzling aspect of international business. We study the provision of public infrastructure as a determinant of such localization. We employ unique data at the district level in India. We identify using variation: (i) among sectors within a district depending upon the sector’s propensity to attract FDI at the national level; and (ii) FDI into surrounding districts. 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. This non-linear effect potentially explains why FDI remains restricted to a few countries.

Affiliation:

Indian School of Business

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