Fiscal decentralization, endogenous policies, and foreign direct investment: Theory and evidence from China and India

► Special interest groups sequentially lobby the central and local governments to block FDI (foreign better technology). ► Endogenous policies toward FDI are favorable only when both central and local governments can benefit. ► High-FDI equilibrium is obtained only when fiscal decentralization falls on endogenous intermediate interval. ► Local government's demand for FDI is endogenously polarized, resulting in dramatically different equilibrium FDI. ► Calibrations for China and India support the theoretical findings.