India has a longstanding reputation for its acclaimed film industry and continues to be by far the world’s largest producer of films. Nevertheless, domestic demand for films appears to be waning as in a number of developed countries with mature film industries. Hence, the econometric analysis in this paper is particularly timely as with demand for films in Indian cinemas falling it is important to identify those factors that make films appealing for Indian audiences. An original dataset is utilised that includes data on all Bollywood films released in India between 2011 and 2015. Account is taken of the potential endogeneity between variables through the use of the generalised method of moments approach. Results are used to demonstrate how the Indian film market can continue to have a significant positive impact on the Indian economy. The discussion highlights appropriate film production company strategies and government policy responses that should be considered to ensure the continued success of the Indian film industry both domestically and in an increasingly competitive international market.

It is immediately clear that while India produces by far the greatest number of films, with the number of films produced continuing to rise, the number of consumers paying to see films at cinemas in India has declined dramatically in recent years, despite significant growth in GDP since 2000 and international investment in the Indian film industry, Fetscherin (2010). However, falling popularity of going to the cinema is not exclusive to India, with falls in cinema ticket sales also seen in the USA and UK. Each of these film markets can be considered mature markets, with long established, successful film production industries, and cinema visits a long-established social activity. Indeed, the first full-length Indian film, Raja Harischandra, was produced in 1913, and by the 1920s, large-scale Indian film studio companies existed, and Mumbai had established itself as an early hub for film making (to become known as Bollywood). See Jones et al. (2008) for a history of the Indian film industry.

The importance of the Indian film industry to the Indian economy cannot be overstated: in 2012, Indian cinema box office revenues were $1.6 billion (McCarthy, 2014), in a services sector which accounts for more than 50% of the Indian economy.Footnote2 Fetscherin (2010) suggests that the film industry accounts for approximately 20% of all revenues in the Indian media and entertainment industries. Further, despite the high profile of ‘Bollywood’ which is based in Mumbai, film production also has positive spillover benefits to other local economies, particularly Chennai where film production has long been established, with films made in four key southern Indian languages. There are also notable film production activities in Hyderabad, Karnataka, Kolkata and Kerala that benefit the local economies. Local economy benefits are not restricted to the direct benefits and multiplier effects associated with film production and therefore employment in specific local economies. Bollywood, in particular, also has tourism benefits with Bollywood locations boosting tourist visitor numbers, i.e. an indirect channel through which the Indian film industry contributes to gross domestic product (GDP).

Yet, the Indian film industry currently faces a number of challenges. First, a major challenge remains film piracy which limits the revenues that can be reinvested by producers, distributors and exhibitors. A complicated system of regulations with responsibility shared by a number of national and state level government departments only contributes to the often ineffective nature of policies and laws that should guard against piracy, Jones et al. (2008). The problem of piracy results in lower revenues across the film industry, and the negative effect on investment in the industry is compounded by the high entertainment tax rates imposed in India.

Second, relative to many countries, domestic cinema ticket prices remain low, Jones et al. (2008) and see Table 1. This again results in smaller box office revenues to be shared between film exhibitors, distributors and producers, reducing opportunities for reinvestment across the Indian film industry. This is particularly important at the moment as international film producers are increasingly investing in expensive technology associated with ‘enhanced format’ films, such as 3D and IMAX. Elliott et al. (2018) have found these films particularly popular with Chinese audiences, but these films require very large production budgets, as well as investment in cinemas by film exhibitors. Nevertheless, despite the costs of producing enhanced format films, they offer the advantage that the piracy of these films is less attractive as the special effects will be much less impressive to viewers when watching pirated films either on television screens or computer monitors. A further issue relating to low ticket prices is that regardless of this advantage, consumers are still purchasing fewer cinema tickets.

Meanwhile, despite difficulties until the early 1990s, the Chinese film market now continues to grow rapidly, both in terms of films produced and audiences’ desire to view films at cinemas. Despite initially slow growth of the film industry in China prior to the 1990s, its film box office revenues were expected to exceed $10 billion in 2016, coming close to overtaking the USA which enjoyed box office revenues of $11 billion in 2015, Shoard (2016). It is within this context that the performance of the Indian film industry has to be considered. The Indian and Chinese film industries share some similarities. Both countries have adopted economic liberalisation policies since the later years of the twentieth century, and as a result in both countries, the film industry has attracted greater foreign investment. Meanwhile, liberalisation has led to greater competition for domestic films from large budget, internationally produced films, often originating in Hollywood, with both Indian and Chinese audiences keen to watch these films.

This paper seeks to identify the factors that contribute to films’ success in Indian cinemas using an econometric analysis such that film production companies are in a better position to identify strategies to ensure their future success. These strategies relate to film characteristics as well as marketing strategy. Given the importance of the film industry to the Indian economy and the difficulties currently faced by the industry, our analysis is particularly important and timely. We believe this to be the first paper econometrically to estimate the determinants of domestic box office success for the Indian film industry. To do this, an original dataset has been collated and utilised, considering all Bollywood films released in Indian cinemas over the period 2011 to 2015. For each film, released data are collected on the size of production budget; Indian cinema box office revenues; film genre; the use of Bollywood star actors and directors; and the distributor of the film in India. Alternative measures of critical acclaim for each film are also collected. As well as identifying those factors associated with films’ Indian box office success, the results of the statistical analysis are used to develop government policy recommendations.

A literature review covering economic analyses of the film industry, both in India and more broadly, is provided in Sect. 2. The data and econometric methodology are described in Sect. 3. Results are reported in Sect. 4, with discussion of these results, policy implications and conclusions provided in Sect. 5.