Natural Disasters, FDI and Intra-National Spillovers: Evidence from India

Abstract

This paper examines the effects of natural disasters on FDI, considering the case of India. Our analysis evidences persistent investment reductions in affected regions following a disaster as well as lasting positive investment spillovers into unaffected Indian regions. We show that these intra-national shifts in multinational firms’ investment patterns are non-random and tend to flow into more developed regions with more skilled labor and greater market potential. Combined, our findings suggest that natural disasters may permanently increase the “risk factor” of investing in affected regions, while systematic FDI spillovers may help explain the prominent divergence in India’s regional economic growth.