Labor Conflict and Foreign Investments: An Analysis of FDI in India

Abstract

This paper analyzes patterns of foreign direct investment in India. We investigate how labor conflict, credit constraints, and indicators of a state's economic health influence location decisions of foreign firms. We account for the possible endogeneity of labor conflict variables in modeling the location decisions of foreign firms. This is accomplished by using a state-specific fixed effects framework that captures the presence of unobservables which may influence investment decisions and labor unrest simultaneously. Results indicate that labor unrest is highly endogenous across the states of India, and has a strong negative impact on foreign investment.

Keywords: Foreign Direct Investment, Labor Disputes, India

JEL Classification: L2, L5, O2