Abstract
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.
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Notes
Polinsky and Shavell (2001) argue in the absence of outside option, the optimum punishment for extortion must be zero.
Choi and Thum (2004) argue that the firms would invest with less sunk cost.
Capital can move freely within a federation. Mesquita and Hafer (2008) discuss a possibility where private firm invests in enforcement to ward off extortion but assume away the outside option of the firm. First, it is difficult to imagine a legal framework where such type of funding can be done. Second, in a federation where capital can move freely, it seems shifting to other states is a cost-effective option that a firm can follow.
See Rose-Ackerman (2010) for a survey of the literature on enforcement against extortion.
Crime India Statistics, National Crime Records Bureau, Government of India (2015).
The other types of clustering are discussed in a companion paper.
10Telengana is excluded as it was formed during 2014. Rest of the UTs and the sates Arunachal Pradesh and Mizoram could not be taken due to paucity of data. The excluded states and UTs together constitute approximately 3.19% area of Indian territory and according to Census data of 2011 these three states constitute of 0.29% of Indian population.
For example, the 2004–2005 series is based on a database of financial statements of 2500 companies as per RBI documents, whereas the new series is based on annual accounts of 5 lakh companies under Ministry of Corporate Affairs. The new series at 2011–2012 prices provide gross value added (GVA) at basic prices instead of GDP at constant prices. The two series may not be directly comparable. See MOSPI (2015) for details.
Mallick (2012) estimates private investment of the manufacturing sector at the state level using data of Annual Survey of Industries (ASI) and analyzed their patterns and determinants, particularly after the economic reforms, for the period of 1993–1994 to 2007–2008.
Factories registered under sections. 2(m)(i) and 2(m)(ii) of the Factories Act, 1948. Defense establishments, oil storage and distribution depots, departmental units such as railway workshops, RTC workshops, Govt. Mints, sanitary, water supply, gas storage etc. are excluded from the purview of the survey.
The calculation is based on the information provided under Block C of the ASI schedule and as per the definition in Government of India (2015).
ASI gives the type of ownership of the surveyed firms. For private manufacturing firms in our computation, we consider two ownership categories, viz. joint private sector firms and wholly private ownership firms.
Gross State Domestic Product.
The NCRB data shows that extortion/100000 pop in India has remained within the range of 0.8 and 0.9 from 2015 to 2019.
The data on latitude and longitude of states are taken from mapsofindia.com.
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Mukherjee, V., Mukherjee, P. & Bose, S. Extortion, competition among states and private investment in a federation: evidence from Indian manufacturing sector. Econ Change Restruct 55, 973–1004 (2022). https://doi.org/10.1007/s10644-021-09335-7
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DOI: https://doi.org/10.1007/s10644-021-09335-7