Journal of Quantitative Economics

, Volume 16, Issue 2, pp 501–525 | Cite as

Regional Incentives and Location Choice of New Firms in India: A Nested Logit Model

  • Nalin Kumar Ramaul
  • Pinki Ramaul
Original Article


This research paper attempts to develop an appropriate econometric model for regional incentives and location choice of new firms in India. The alternative econometric models of location choice include ordinary least squares, multinomial logit model, Poisson (count) model, conditional logit model and nested logit model. The present study utilised two-level Nested logit model, a discrete choice regression technique, to estimate the influence of regional incentives on the location choice of new firms in India. In considering what groupings of location choices to use for the upper nest of the tree structure, we simply categorised areas into designated and non-designated status, as defined by policy. We divided the area in two nests or subgroups, or regions: the Special Category States or the Beneficiary States (Jammu and Kashmir, Himachal Pradesh and Uttarakhand) which have been granted special investment incentives package and the Control Group or the Non-Beneficiary Neighbouring States (Haryana, Punjab and Uttar Pradesh) which were given no regional incentives. We have considered only firms established between 2002–2003 and 2010–2011. The independent variables considered for the analysis include investment incentives (dummy variable), manufacturing agglomeration, market potential and land cost. The nested logit model was estimated with full information maximum likelihood estimation using Stata software. The estimation validated the importance of regional fiscal incentives and manufacturing agglomeration as the most important determinants of industrial location.


Industrial location Econometric models of location choice Nested logit model Regional incentives Special category states in India 

JEL Classification

R3 Spatial Production Analysis and Firm Location L5 Regulation and Industrial Policy 


  1. Barrios, Salvador, Luisito Bertinelli, Strobl Eric, and Teixeira Antonio Carlos. 2003. Agglomeration economies and the location of industries: a comparison of three small European countries, CORE Discussion paper, 2003-67.Google Scholar
  2. Bartik, T.J. 1985. Business location decision in the United States: estimates of the effects of unionization, taxes, and other characteristics of states. Journal of Business & Economic Statistics 3 (1): 14–22.Google Scholar
  3. Basile, R., Davide Castellani, and Antonello Zanfei. 2003. Location choices of multinational firms in Europe: the role of national boundaries and EU policy. University of Urbina, Italy, Working Paper Series on Economics, Mathematics and Statistics, Quaderno/ Working Paper No. 78/2003.Google Scholar
  4. Bekes, Gabor. 2005. Location of manufacturing FDI in Hungary: how important are business-to-business relationships? MNB (Magyar Nemzeti Bank) Working Paper No. 2005/7, Central Bank of Hungary, Budapest, Hungary.Google Scholar
  5. Ben-Akiva M. E. 1973. Structure of passenger travel demand models. Ph.D. dissertation. Department of Civil Engineering. MIT, Cambridge, Mass.Google Scholar
  6. Cameron, A.Colin, and Pravin K. Trivedi. 2010. Microeconometrics Using Stata, Rev ed. College Station, TX: Stata Press.Google Scholar
  7. Carlton, D. 1983. The location and employment choices of new firms: an econometric model with discrete and continuous endogenous variables. Review of Economics and Statistics 65: 440–449.CrossRefGoogle Scholar
  8. Chen, George S. 2011. Foreign-specific agglomerations and the location of Taiwanese direct investment in China. School of Business, Economics and Public Policy, University of New England, Business, Economics and Public Policy Working Papers, Number: 2011- 5.Google Scholar
  9. Christiadi, Brian Cushing. 2007. Conditional Logit, IIA, and alternatives for estimating models of interstate migration. Research Paper 2007-4, Paper Presented at the 46th annual meeting of the Southern Regional Science Association, Charleston, SC, March 29–31, 2007.Google Scholar
  10. Crozet, Matthieu, Thierry Mayer, and Jean-Louis Mucchielli. 2004. How do firms agglomerate? A study of FDI in France. Regional Science and Urban Economics 34 (1): 27–54.CrossRefGoogle Scholar
  11. Disdier, Anne-Celia, and Thierry Mayer. 2004. How different is Eastern Europe? Structure and determinants of location choices by French firms in Eastern and Western Europe. Journal of Comparative Economics 32 (2): 280–296.CrossRefGoogle Scholar
  12. Devereux, Michael P., and Rachel Griffith. 1998. Taxes and the Location of production: evidence from a panel of US multinationals. Journal of Public Economics 68 (3): 335–367.CrossRefGoogle Scholar
  13. Greene, William H. 2003. Econometric Analysis. India: Pearson Education.Google Scholar
  14. Guimaraes, Paulo, Robert J. Rolfe, and Douglas P. Woodward. 1998. Regional incentives and industrial location in Puerto Rico. International Regional Science Review 21 (2): 119–138.CrossRefGoogle Scholar
  15. Guimaraes, Paulo, Octavio Figueiredo, and Douglas Woodward. 2000. Agglomeration and the location of foreign direct investment in Portugal. Journal of Urban Economics 47 (1): 115–135.CrossRefGoogle Scholar
  16. Guimaraes, Paulo, Octavio Figueiredo, and Dougas Woodward. 2003. A tractable approach to the firm location decision problem. Review of Economic and Statistics 85: 201–204.CrossRefGoogle Scholar
  17. Hansen, Eric. 1987. Industrial location choice in Sao Paulo, Brazil: a nested logit model. Regional Science and Urban Economics 17: 89–108.CrossRefGoogle Scholar
  18. Head, Keith, and Thierry Mayer. 2004. Market potential and the location of Japanese investment in the European Union. The Review of Economics and Statistics 86 (4): 959–972.CrossRefGoogle Scholar
  19. Heiss, Florian. 2002. Structural choice analysis with nested logit models. The Stata Journal 2 (3): 227–252.Google Scholar
  20. Henderson, J.Vernon, and Ari Kuncoro. 1996. Industrial centralization in Indonesia. The World Bank Economic Review 10 (3): 513–540.CrossRefGoogle Scholar
  21. Hensher, David A. 1986. Sequential and full information maximum likelihood estimation of a nested logit model. The Review of Economics and Statistics 68 (4): 657–667.CrossRefGoogle Scholar
  22. Hensher, David A., and William H. Greene. 2002. Specification and estimation of the nested logit model: alternative normalisations. Transportation Research Part B: Methodological 36 (1): 1–17.CrossRefGoogle Scholar
  23. Koppelman, Frank S., and Chandra Bhat. 2006. A Self Instructing Course in Mode Choice Modelling: Multinomial and Nested Logit Models. Department of Transportation, Federal Transit Administration: Prepared for U.S.Google Scholar
  24. Koppelman, Frank S., and Chieh-Hua Wen. 1998. Alternative nested logit models: structure, properties and estimation. Transportation Research Part B: Methodological 32 (5): 289–298.CrossRefGoogle Scholar
  25. List, John. 2001. US county-level determinants of inbound FDI: evidence from a two-step modified count data model. International Journal of Industrial Organization 19: 953–973.CrossRefGoogle Scholar
  26. Marshall, A. 1890. Principles of Economics. London: MacMillan.Google Scholar
  27. McFadden, Daniel. 1974. Conditional logit analysis of qualitative choice behavior. In Frontiers in Econometrics, ed. Paul Zarembka, 105–142. New York: Academic Press.Google Scholar
  28. McFadden, Daniel. 1978. Modelling the Choice of Residential Location in A. Karlqvist, L. Lundqvist, F. Snickars, and J. Weibull (eds.), Spatial Interaction Theory and Planning Models. North Holland, Amsterdam, pp. 75–96.Google Scholar
  29. Ministry of Commerce and Industry. 2013. Statement in Rajya Sabha to an Un-starred Question No. 2849 for answer on 20th March. 2013. Incentives to Industries in NER and J&K and Special Category States. Government of India, New Delhi.Google Scholar
  30. Mucchielli, Jean-Louis, and Florence Puech. 2004. Globalization, agglomeration and FDI location: the case of French firms in Europe, pp. 35–58. Cheltenham: Multinational firms’ location and the new economic geography. Edward Elgar.Google Scholar
  31. Mucchielli, Jean-Louis, Pei Yu, and Qunyong Wang. 2010. Do MNES engage in hierarchical location Choice? Evidence from U.S and European FDI in china. Cahiers de Recherche PRISM-Sorbonne CR -0-37.Google Scholar
  32. Mukim, Megha. 2011. Essays in Trade and Economic Geography. Ph.D. Thesis, Department of International Development, London School of Economics, London.Google Scholar
  33. Papke, Leslie E. 1989. Interstate business tax differentials and new firm location: evidence from panel data. WP 3089-89, Massachusetts Institute of Technology, Cambridge, Massachusetts.Google Scholar
  34. Popescu, Raluca Georgiana. 2012. The regional location of foreign direct investments: a review of the evidence. Anale, Seria Stiinte Economice, Timisoara 18: 758–765.Google Scholar
  35. Schmidheiny, Kurt, and Marius Brulhart. 2011. On the equivalence of location choice models: conditional logit, nested logit and Poisson. Journal of Urban Economics 69 (2): 214–222.CrossRefGoogle Scholar
  36. Silberhorn, Nadja, Yasemin Boztug, and Lutz Hildebrandt. 2007. Estimation with the Nested Logit Model: Specifications and Software Particularities. SFB 649 Discussion Paper 2007-046, Humboldt-Universitat zu Berlin, Germany.Google Scholar
  37. Steenbergen, Marco R. 2008. Discrete Choice Models for Political Analysis. Lecture Notes, Universität Bern.Google Scholar
  38. Train, Kenneth E. 2002. Discrete choice methods with simulation, vol. 8. Cambridge: Cambridge University Press.Google Scholar
  39. Williams, Richard. 2012. Using the margins command to estimate and interpret adjusted predictions and marginal effects. The Stata Journal 12 (2): 308–331.Google Scholar
  40. Wooldridge, Jeffrey M. 2002. Econometric analysis of cross-section and panel data. London: The MIT Press.Google Scholar
  41. Wu, Fulong. 1999. Intrametropolitan FDI firm location in Guangzhou, China: a Poisson and negative binomial analysis. Annals of Regional Science 33: 535–555.CrossRefGoogle Scholar

Copyright information

© The Indian Econometric Society 2017

Authors and Affiliations

  1. 1.Department of EconomicsGovernment CollegePaonta Sahib, District SirmaurIndia
  2. 2.Paonta Sahib, District SirmaurIndia
  3. 3.Trivenee School of ExcellencePaonta Sahib, District SirmaurIndia

Personalised recommendations