In this paper we examine the pattern of inward FDI at the disaggregated industry level (NIC 3- digit), and test for the industry-specific characteristics that have been significant in attracting foreign investment in India during 2000-10. Since highly polluting industries (based on Central Pollution Control Board classification) have accounted for a substantive share of the FDI inflows, we control for these industries to discern the differential impact of industry characteristics in the dirty manufacturing sector. Our analysis of the FDI inflows focuses on a panel of top ten investing countries, as well as individual countries with relatively stringent environmental norms. Our results indicate that aggregate FDI in India was most significant in capital-intensive industries and those with large market size. Similarly, investment from Japan and UK was most significant in capital-intensive industries. However FDI from the US was significant in less-energy intensive industries, while within the pollution-intensive industries, market size was the main determinant of investment inflow. Only investment from Singapore located in in employment-generating industries. We infer that the pattern of FDI in India has been largely towards capital-intensive industries, and in polluting industries with large market size. But growth in FDI inflow failed to exploit scale economies and generate jobs during the last decade.

Rashmi Rastogi, Aparna Sawhney

Published in Berlin Working Papers on Money, Finance, Trade and Development, January 2014