Introduction: With India and China becoming important players in the global economy; it is indeed a great value and learning experience to undertake the research on the impact and incidence of FDI. The growth and development of the Indian economy in the last decade can be experienced to a large extent with the opening of the economy to foreign investments.
Objective: To explore whether FDI is the economic driver of this growth engine, the present study tries to analyze the holistic as well as detailed picture of the impact of FDI on labour productivity and employment across different states in India.
Data/Methodology: The state-wise data covers 19 major states of India for the post reform period from 1991 to 2000. Approved FDI data over the period 1991-2000 for the state have been collected from the publications of the Ministry of Industries and Commerce, Government of India. The data for the other variables are compiled from Handbook of statistics on the Indian economy, Indian statistical abstract, labour bureau, Annual Survey of Industries.
 The study hypothesised that FDI with such intervening variables like gross capital formation, wage rate and per capita income exert direct influence on labour productivity and employment.
The SUR models postulated for the impact study are:
lnLP_it =γ_s  + λ_1sln FDI_st + λ_2slnGCF_st + λ_3slnW_st + u_st …………….…........ (1)                      
                                                                                                   s = 1, 2 .....8
                                                                          t = 1, 2 ...10
Where LP is labour productivity; GCF and W are gross capital formation and wage rate respectively.
lnE_it = γ_s + λ_1slnFDI_st + λ_2slnPI_st + λ_3slnGCF_st + u_st   …………..….......... (2)                      

                                                                                                   s = 1, 2 .....8
                                                                           t = 1, 2 ...10
Where, E is employment; PI and GCF are per capita income and gross capital formation respectively.
Three methods appropriate for this study have been made use of. They are Fixed Effects (FE), Random Effects (RE) and Seemingly Unrelated Regression (SUR) models. Panel data model gives a holistic view whereas SUR model gives a more detailed picture of the eight states of India during the post reform period over a period of ten years. The eight states of India are chosen from all the four regions viz. Delhi and Haryana from North, West Bengal and Orissa from East, Maharashtra and Rajasthan from West, and Karnataka and Kerala from South.
Results: Results show that overall FDI has a positive impact on labour productivity but across region the benefit of FDI is quite uneven. The impact of FDI is negative in less developed states, while it is significant and positive in catching up states. However the labour productivity is growing only at the expense of employment. This tends to ponder that will liberalization make rich states richer with the poor states lagging behind or there can be any convergence across states through these reforms.