Determinants of Industrial Location Choice in India: A Polychoric Principal Component Analysis Approach

Abstract

This research paper attempts to identify the factors determining industrial location choice in India, which is essential for formulation of an effective industrial location policy. There are two broad approaches to identify the determinants of firms’ location decisions. One is ‘Modelling’ approach or ‘Revealed Preference’ approach or an econometric analysis of empirical patterns to identify revealed preference based on the characteristics of the region. The second approach is the ‘Stated Preference’ (or Industrial Location Survey) approach. Survey research typically identifies one or more key respondents and asks them about the factors, which influenced their location decision choice. The present research paper is based on the Industrial Location Survey approach. It attempts to analyse the primary survey data collected in the solicited research study sponsored by the Planning Commission, Government of India. The primary study consisted of a sample survey in the Special Category States or the Beneficiary States viz. Jammu and Kashmir, Himachal Pradesh and Uttarakhand; and the Control Group or the Non-Beneficiary Neighbouring States viz. Haryana, Punjab and Uttar Pradesh. The data from the questions concerning importance of location factors was derived using Likert rating scale. The Polychoric Principal Component Analysis is used to identify the key factors in industrial location. The analysis validates the importance of fiscal incentives in industrial location.