Environmental governance and foreign direct investment inflows to the Indian States

The present paper tries to examine the role of environmental governance in the case of Indian states to attract Foreign Direct Investment (FDI). To test for the hypothesis, the study computes an abatement cost index adjusted for industrial composition at the state level using methodology given by Levinson (2001). The study then compares the actual pollution abatement costs in each state, unadjusted for industrial composition, to the adjusted abatement costs in each state, where the adjustments are based solely on nationwide abatement expenditures by industry and each state’s industrial composition. This is followed by testing whether this index has any role in attracting FDI in a state using data for two periods - 2002 and 2005 for 16 major states after controlling for other variables having an impact on FDI attractiveness. The analysis finds support for environmental governance, as the states which have higher abatement costs tend to attract more FDI.