FDI (foreign direct investment) in wind energy sector in India: Testing the effectiveness of state policies using panel data

• We compute a state-wise policy index for wind energy in India.
• We examine effectiveness of this index in attracting FDI (foreign direct investment) using panel data techniques.
• Index has positive influence on FDI in wind sector.

This paper examines the role of state level institutional differences in attracting FDI (foreign direct investment) in wind energy in India. The role of institutional differences is measured by means of constructing a policy index using five key policies in wind energy: feed-in-tariff, open access transmission, third party sale, banking, and wheeling charges. Panel data techniques are then employed to investigate the impact of the policy differences on FDI inflow in wind energy for eight Indian states that have significant resource potential over the seven year period (2004–05 to 2010–11) after controlling for several state-specific factors. The results indicate that state-specific policy index for wind energy is significant in attracting FDI in a state irrespective of whether control variables are included or not.