Natural disasters, intra-national FDI spillovers, and economic divergence: Evidence from India

Abstract

This paper studies the effects of natural disasters on foreign direct investment, considering the case of India. We document large and persistent investment reductions in affected regions following a disaster as well as lasting positive spillovers into otherwise unaffected Indian regions. Intra-national relocations account for more than two-thirds of the losses in affected areas, explaining the puzzlingly small country-level findings of previous works. Furthermore, we show that these investment shifts tend to flow into more developed, less disaster-prone regions, fueling the prominent divergence in India’s economic growth. Combined, our results suggest that multinational firms consider both local cost and region-specific disaster risk when selecting locations for production.