Extortion, competition among states and private investment in a federation: evidence from Indian manufacturing sector

The paper argues both theoretically and empirically that incidence of extortion reduces the flow of private investment at a state in a federation. The states compete in terms of their firm/industry-specific investment to retain the investment in their own jurisdiction. It uses the data from Indian states for the empirical analysis. The spatial regression technique used in the analysis takes into account the proximity of the states in terms of their industry-specific investment and finds that the states similar in terms of industry-specific investment have similar private manufacturing investment. Also, a higher rate of extortion in a state creates a negative spill-over effect on the flow of private investment in the state from the private investment in other similar states. The results suggest that a policy of controlling extortion has significant return in terms of flow of private investment in a state, which is not mitigated through industry-specific investment.