Automobile and auto-ancillary manufacturing in India is highly concentrated, with four auto clusters receiving approximately 91% of the total Foreign Direct Investment (FDI) in this sector. Technological spillovers, factor endowments, etc., were identified as some of the factors influencing firm co-location. This paper observes the impact of agglomeration as well as state-specific endowments on the development of automotive clusters in India. In order to determine the motives deriving location choices of foreign automobile firms in India, one agglomeration and nine control variables were identified and tested using Dynamic Linear Programming Regression (DLPR) model. Presence of incumbent Indian automobile firms, higher per capita income and higher demand for vehicles turned out to be some of the important determinants of location choices of foreign automobile firms in the country.

FDI is a key driver in the fast growing global financial integration, called Globalization. It provides a way of creating long-term, consistent and direct relationships between economies. Under the right policy setting, it can be a significant driver for the development of domestic enterprises of the host country.

The Organization for Economic Cooperation and Development (OECD) in its 4th benchmark defined FDI as “Cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest with a 10% or more voting power in an enterprise (the direct investment enterprise) that is resident in an economy other than that of the direct investor”. The same was adopted by India in the union budget of the year 2012-13. The stimulus to considerably control or influence a firm is the basic factor that distinguishes direct investment from portfolio investments.

Business Strategy, Agglomeration, Foreign Automobile Firms, Foreign Direct Investment (FDI), Dynamic Linear Programming Regression (DLPR), Organization for Economic Cooperation and Development (OECD), India, Empirical Evidence.