fdi in india and its growth linkages - Department Of Industrial Policy ...

FDI IN INDIA AND ITS GROWTH LINKAGES
of production which provide enabling conditions for producing certain goods, e.g., tea, wine, photographic films, etc.
Locational spillovers refer to physical as well as intellectual spillovers.
It is observed that 10 out of the top 25 FDI employment sectors have relatively high agglomeration and 9 are relatively
dispersed; six sectors are moderately agglomerated. Some of the highly agglomerated sectors with high employment in
FDI-enabled production units include growing of crops; motor parts; general purpose machinery; medical appliances
and transport equipment, among others.
In the case of output, 6 out of the top 25 FDI sectors have relatively high agglomeration and 11 are relatively
dispersed; eight sectors are moderately agglomerated. Some of the highly agglomerated sectors with high output in
FDI-enabled production units include motor parts, general purpose machinery, transport equipment, and medical
appliances, among others.
While agglomeration estimates have been based on state-level data, the determinants of locational choice are analysed
at the state as well as at the city level. Apart from this, one may also consider variations across geographical regions like
north, east, west and south. Firm-level characteristics may also be considered; while firms are generally headquartered
in relatively large cities, the plants may be located in large as well as small (Class-3) cities.
Multiple factors are likely to play a simultaneous role in helping a firm decide on plant location. The decision would
primarily be based on the nature of the plant under consideration. For example, it is more likely that an integrated iron
and steel plant would be located close to regions producing primary inputs (iron ore and coal) and a cement plant close
to limestone quarries. State-level factors may include the number of SEZs, energy deficit, per capita income, and the
number of workers’ unions, among others. City-level factors may include congestion in a city, presence of a port / airport
/ SEZ, distance from the nearest major city, and the share of FDI plants in total plants, among others. The share of FDI
plants in total plants in a city may be taken as a proxy for FDI plant density / FDI agglomeration.
It was observed that the alternative econometric specifications make some independent variables consistent in terms of
sign and significance, whereas other variables provide fragile results with respect to sign / significance. Variables
including the share of FDI plants in a city and electricity deficit to availability ratio in a state are robust across various
model specifications. One variable that shows less robust results is per capita income. However, we have included this
in the final specification of the model as a proxy for level of development of a state.
Regions do not have an influence on FDI plants to locate in Class-3 cities. In general, FDI firms prefer to locate in
Class-3 cities which are relatively far from the nearest Class-1 city. However, in the southern region, the probability of
an FDI firm being located 100 to 500 km from the nearest Class-1 city is less than that in the northern region. In the
case of the eastern region, the probability of an FDI firm being located beyond 100 km from the nearest Class-1 city is
greater than that in the northern region. The western region does not indicate any significant difference in terms of FDI
plant location in Class-3 cities based on distance from the nearest Class-1 city vis-à-vis the location pattern in the
northern region. �
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