India’s economic reforms in 1991 permitted investors to freely choose their preferred investment locations across the various states in the Indian union, leading to competition between states to attract investment projects through a bettering of their investment climates. The performance of states over the past 17 years in terms of attracting investments has widely varied: two states, Maharashtra and Gujarat have together accounted for over 30% of India’s investments projects while other states have been much less successful. Some states, after a period of considerable neglect, have seen steady upswings in investment inflows while some others have fallen from their past images as good investment destinations. Using panel data across 18 of India’s most economically active states and covering the period 1998-2006, this study attempts to determine the critical factors which drive investment inflows across Indian states. The empirical findings predict that political stability and fiscal reforms are the two most important factors determining investment inflows across states. Using a disaggregated analysis, the study predicts that states successful in maintaining political and fiscal stability stand to gain most from public investments in human capital formation in terms of increased investment inflows. The study concludes that investors select states as investment destinations predominantly on the basis of their contemporary socio-economic performance as opposed to their past images as investment destinations.