Explaining Foreign Direct Investments in Gujarat: A Study Based on an Opinion Survey of Persons Involved in the Foreign Direct Investment Process

Abstract

Gujarat has attracted more foreign direct investment (FDI) than what its GDP size alone would suggest. But relative to its peer states (especially Tamilnadu, Delhi, Maharashtra and Karnataka, and possibly Andhra Pradesh) it has fallen short significantly. The above findings which we made in an earlier study are further confirmed through a survey of opinions and views of CEOs and others intimately concerned with the foreign investment decision process. The survey also brought out the crucial importance of infrastructure, and the quality of governance. Interestingly most of the problems are capable of being corrected through appropriate government action. The intrinsic exploitable advantages of the state remain large.Electricity supply - its poor quality, inadequacy and high price; the adverse law and order situation including the impact of the communal strife and riots and the perception of biases in the implementation of law have been important in adversely affecting FDI. The large comparative advantage of the state in industry and manufacturing implies that the states’ future is intimately dependent upon the growth of manufacturing in India. Success therefore involves coordination with the central government, because many of the difficulties in moving forward and in evolving into modern industries faced by Gujarat's existing manufacturing involve policy infirmities at the central/macroeconomic level. Important among these are the 'inverted tariff structures' that many of Gujarat's manufacturing, especially those in the small and medium scale industries, face and the tame pricing of the Indian rupee, in contrast to East Asian countries' strategy of undervaluing their currencies.There is much that Gujarat can do to attract the new manufacturing and service industries (offshore industries of a wide variety, IT and biotechnology industries). Besides the improvement of Governance especially with regard to control over communal strife, it would need to improve the quality of life in cities and overcome the infrastructural constraints especially with regard to education and availability of technical skills. If Ahmedabad its principal city, can improve its ranking in the hierarchy of central places, Gujarat could successfully attract a lot more FDI, and other non-equity forms of collaboration in the new manufacturing and service industries.