Equity and Efficiency of Foreign Direct Investment in Indian States

The two relevant criteria for evaluating the performance of the Indian economy in regional terms, in respect of FDI flows, according to our understanding are efficiency and equity. Since FDI is primarily a relocation of international production it is based on the principle of optimal resource allocation. The notion of efficiency, in this context, refers to the tendency of FDI to flow to those regions or States which have efficient production. The other side of the coin is that an efficient State deserves to get a greater share of FDI. This spells out the notion of equity. The paper uses set of new indices, including index of rank dominance, which shows that the most dominant centre is Mumbai. The paper also uses a 2-Stage Least Square (2SLS) estimation procedure, with two panel regression fixed effects models. There is a very high elasticity of FDI flows w.r.t. SDP growth. Also the results show that there is an extremely high negative correlation (-0.996) between equity and efficiency. The states that are more efficient receive less of FDI flows. This points towards non-economic forces in operation that influence FDI flows and regional development.

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