ABSTRACT
India is not only one of the world's fastest growing emerging economies, but it is also home to some of the world's largest foreign investments (UNCTAD 2012). The bulk of these investments started to flow in from the late 1990s after the government of India reformed its existing foreign investment policy regime. One important reform initiated by the government to attract investments and generate export promotion was the new Special Economic Zone (SEZ) policy. An SEZ is a special geographic region within a state that has distinct economic laws (such as state-specific industrial policy) separate from a country's generally applicable laws, with the objective of increasing economic growth and boosting employment through increased domestic and foreign investment. A key component of SEZ policy was that the central government would provide a broad policy framework that would help create SEZs, but state governments were allowed to form their own SEZ policies that cater to the requirements of respective states. Many suspect that this created competition among states to attract investments into SEZs, in the same way that Kanta (2011), Schneider (2004) and Venkatesan (2000) cite examples of large tax and other fiscal incentives that states within India offered to attract both private and foreign investment. Others argue that competition among states to attract investments might be a consequence of the marked variation in sub-national investment patterns in India after market reforms in the 1990s (Ahluwalia 2000).
