Chakrabarti, R and Subramanian, K and Meka, S
(2017)
Localization of FDI Flows: Evidence on Infrastructure as a Critical Determinant.
Journal of Law, Finance, and Accounting, 2 (1).
pp. 205-246.
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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.
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