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Energy prices key to investment decisions by firms: study

By Our Special Correspondent

MUMBAI, NOV. 24. Indian firms have identified electricity prices as the single most important factor in decisions on plant location. A World Bank study also stated that the frequency of power outages and disruptions in phone services also matters.

"Energy prices for industry are considerably higher in India than in many industrial and developing countries,'' stated World Bank study on `India — Investment Climate Assessment 2004,' released today.

Even across Indian cities, the electricity costs borne by firms greatly vary.

Energy costs increase consistently and significantly (in food processing, textiles, metals and machinery sectors) with superior market access, own-industry clustering and industrial diversity, thereby lowering the benefits of locating in these areas.

Regulatory burdens also play an important role in determining the location. "Our analysis shows that cities where firms in general face a lower burden of regulation are likely to receive more investment and greater shares of manufacturing activities.'' It also shows that the probability of a business locating in a city is lower depending on how much time business managers must spend dealing with regulations or on the average frequency of absenteeism (the more absenteeism reported for a city, the less likely firms will locate there); the latter is used as a proxy for the quality of labour regulation.

As for labour costs, "We find that after accounting for the skill mix and labour market problems, firms are in fact willing to pay higher wages for better workers. We also used worker absenteeism as an indicator of labour market problems; on an average, higher levels of absenteeism are negatively associated with business location decisions.''

As for access to land, results suggest that the local state's land policies have considerable impact on industry location across and within metropolitan areas. The larger the proportion of survey respondents reported to complain about land shortages in a city, the less likely new businesses will be located there.

"Large potential gains can therefore be had by using these indicators to create a better investment climate. Improvements in these several key indicators will translate into greater profitability as better climate locations produce more investment and economic activity in those regions,'' the study added.

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