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The Indian economy has experienced a boom in outward FDI (OFDI) in 2006. The study aims at exploring the factors that drive the boom in OFDI of Indian firms.

The participation of a firm in OFDI is a two-stage process -first, the decision to internationalization and second, how much to invest. We employ a two-stage model to decompose the effects on the decision to internationalization from effects on how much to invest. The two-stage model has the advantage of allowing us to estimate separately the probability of internationalization by a firm – Pr(OFDI > 0) – and the expected volume of investment, E(OFDI|OFDI > 0). The former is estimated by the probit model and the latter is estimated by the ordinary least square model.

The study finds that prior experience and institutional advantage can strongly drive the internationalization of Indian multinationals. The study also examines the relative importance of two aspects of prior knowledge – length of prior knowledge and depth of prior knowledge on OFDI of Indian firms. The study finds that the depth of prior knowledge is a must influential driver of OFDI in comparison to its length.

The present study is a novel attempt to investigate, ‘What drives the boom in OFDI from India?’

The purpose of the paper is to contribute to the understanding of regional entrepreneurial development by constructing an institutional environment index in India, where high heterogeneity is found in the economic development and entrepreneurial activities across its states. It tries to fill the gap of research which hampers the effectiveness of policy efforts to promote job growth through entrepreneurship development in India and contributes in understanding the phenomenon why the relative contribution of entrepreneurship varies across states.

The paper uses a composite index of institutional quality based on the Penalty for Bottleneck (PFB) methodology to capture the institutional environment differences across the states of India. The relationship between the institutional environment and the measures of entrepreneurship is established through various statistical and econometric techniques such as correlation and regression.

The paper finds the regional and contextual institutional environment differences in India starker and more varied than is generally viewed. The empirical evidence suggests that the differences in institutional quality scores can play a significant role in explaining the variations in the extent of entrepreneurial activities across the Indian states. The findings of this paper demonstrate a differential influence of the local institutional environment on the entrepreneurial activities at a regional level in a developing economy like India.

This study is limited by the data sources and index design; therefore, it cannot completely specify all institutional factors and their combined influences on entrepreneurial activities at the regional level. However, it makes a significant contribution to expanding the current body literature of institutional environment reform and entrepreneurship development in developing countries.

The policy implication of the paper highlights the need of policymakers to think outside the individual policy silos and consider the institutional environment as a whole. Priority attention of the policymakers should be on the institutional reform for any type of entrepreneurship development. A corollary implication of the O-ring theory of development and the PFB methodology is that the policy effort is allocated most effectively when it seeks to alleviate bottlenecks.

The main implication of this paper for the policymaking is that it is necessary to focus more on the weak institutional factors (bottlenecks) and on the general environment improvement for any entrepreneurship development.

The study contributes to study the problem of entrepreneurship discrepancy in India through the lens of institutions and institutional environment. This study is an improvement over the previous studies by testing the statistical significance of the institutional environment on the entrepreneurship.