The role of human capital and infrastructure development in attracting FDI: A study of Indian states

Abstract

Foreign direct Investment is a preferred source of capital in developing countries who are invariably in need of funds for development purposes. Foreign investors look for certain characteristics of the host economy which make them favourable for investment. The presence of skilled labour and infrastructure facilities are two such preconditions of the host country that tend to increase the profitability of the foreign investment. This paper studies the states of India which are recipients of the major share of FDI inflows in India and finds that the states which are in receipt of maximum FDI are also high on human capital and infrastructure development. When all the states of India for which data is available are taken into account to ascertain whether human capital and infrastructure development influence the amount of FDI, the paper finds support for the proposition that infrastructure development affects the choice of location for foreign investment while human capital does not play a decisive role in influencing FDI.