Association for Public Policy Analysis & Management

The paper investigates the role played by electricity infrastructure presence and performance in attracting Foreign Direct Investment (FDI) to Indian States. The hugely skewed distribution of FDI across Indian States together with evidence reporting that the bulk of recent FDI has been made in the services sector led us to formulate the hypothesis that higher levels of installed electricity production capacities and lower levels of electricity losses would be statistically associated with higher FDI inflows in any given state. To test this hypothesis, we compiled an original dataset with data concerning Indian States and performed a panel analysis for a ten-year period (2001 - 2010). The analysis shows that investments in India are affected by a state’s past record of infrastructure including roads, tele density, and electricity. In different models, given the ten years of data, we find statistical significance for a strong effect of reliable electricity on the flow of FDI.