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

SECONDARY DATA-BASED ANALYSIS
The base specification includes six variables, namely, number of operational SEZs in a state, share of FDI plants in total
plants in a city, airport location in a city, state-wise electricity deficit to availability ratio, firm-wise export intensity and
state-wise number of labour unions. The regression results show that the share of FDI plants in a city exerts a positive
and significant effect on the location of FDI plants in Class-3 cities. This is consistent throughout our other regression
specification estimates. The probability that a firm establishes a plant in a Class-3 city is higher if the firm is relatively
export-intensive. However, other factors have a negative influence on the probability of a plant being set up in a Class-
3 city; these factors include the location of an airport in a city, state-level electricity deficit to availability ratio and the
number of labour unions in a state. There is some indication in our preliminary regressions that location-specific
infrastructure facilities like the existence of a major port and operational SEZs in a particular Class-3 city exert a
negative influence on FDI plant location in that city. This may happen due to likely congestion and relatively high land
prices in such Class-3 cities. However, the state-level number of operational SEZs has a positive influence on FDI plant
location in Class-3 cities. This variable is a proxy for state-level infrastructure and government incentives to attract FDI
plants. The number of labour unions at the state level, which is a proxy for labour market rigidity, shows that it reduces
the probability of FDI plants coming to Class-3 cities in that state.
In the final specifications, we have included per capita income at the state level, regional dummies, distance dummies
and the interaction between region and distance dummies, along with our base-specific variables. The sign and
significance of the base run variables remain intact in our final estimated regression result. The impact of per capita
income exerts a mildly positive influence on FDI plant location in Class-3 cities.
Regions do not influence 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
locating itself 100 to 500 km from the nearest Class-1 city is lower than that in the northern region. In the case of the
eastern region, the probability of an FDI firm locating itself beyond 100 km from the nearest Class-1 city is higher 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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