This study investigates the regional determinants of foreign direct investment (FDI) inflows into Indian states from 2010 to 2024. It aims to explore how subnational agglomeration externalities – specialization, diversification and competition – influence the spatial distribution of FDI within an emerging market context.
Using disaggregated state-level data and applying conditional logit and nested logit models, the study estimates the impact of agglomeration economies on FDI location decisions. It also controls for institutional and infrastructural variables such as ease of doing business, market potential and transport connectivity, while addressing endogeneity and multicollinearity through robust model specification.
The results show that both specialization and diversification positively influence FDI inflows, though their effects vary across regions. Excessive competition, on the other hand, tends to deter investment. The nested logit model reveals that over-specialization and infrastructure congestion can offset expected benefits, highlighting the nuanced and region-specific nature of agglomeration forces in FDI attraction.
The findings offer actionable insights for regional policymakers, emphasizing the importance of balanced industrial diversification and calibrated competition levels in fostering long-term foreign investment.
This research extends existing FDI theory by incorporating subnational variation into the analysis, challenging national-level assumptions common in emerging market literature. It provides one of the first empirical applications of nested logit models to examine agglomeration economies and FDI in India, offering a structured framework applicable to other large, institutionally diverse economies.
