What Explains Geographic Variation in Corproate Investment?: A Tale of Colonial Hangover
Shohini Kundu, Finance PhD student
Nishant Vats, Finance PhD student
The objective of this paper is to explore the potential factors that explain geographic variation in corporate investment, specifically the effect of historical institutions on contemporary spatial distribution of investment. This paper documents four new facts about investment in India: (1) Investment within a state is heavily concentrated among specific districts. (2) The spatial concentration of investment within a state cannot be explained by differences in geographic features, the de-jure legal framework, or the availability of factors of production. The geographic concentration of investment can instead be explained by the historical institutions under which the factors of production operate, the de-facto rules of the game. Specifically, private investment is concentrated among districts which were historically governed by native Indian rulers (princely states). (3) The geographic concentration of investment in princely districts is driven by investment of state-owned enterprises (SOE). SOEs are private firms where government possesses majority control rights. (4) This difference in investment has been increasing over time. Lastly, we identify the underlying mechanism through which historical institutions affect current economic outcomes and how the state creates frictions that drive outcomes away from the first-best spatial equilibrium and propagates spatial inequality.