This could be of concern for many reasons.  

First, politicians need to show quick results to the masses. And they are liable to promise all kinds of subsidies, freebees, regulatory relaxations, tax holidays, etc, in order to attract large-scale investments with a high PR value.  Most such promises have long-term implications on the state budget. But the benefit to the politician is in the short term. Therefore there is a likelihood of the ruling politician to yield more than he should.  

Second, many state governments are quite small in size and lack necessary expertise when compared to large corporate houses. In typical negotiation and bargaining situations therefore they may end up yielding inordinate benefits.

Third, many such incentives to attract investment also may have anti-competitive implications, as those competitors that have not availed themselves of such benefits will unnecessarily have to suffer.  

Fourth, such one-on-one benefits hinder the development of open and transparent markets and economy that provide a level playing field to all, irrespective of size or scale.

Not surprisingly, empirical studies from both India and abroad suggest that such inter-state competition for investment leads to extraordinary benefits for large private investors at the cost of overall welfare. Most such studies tend to call for some action that would prevent such inter-state competition.  

But the benefits of such competition between states also cannot be negated. For one, such competition forces state governments to be on their feet in being responsive to the requirements of investors. Two, it reduces the bargaining power of lobbies that extract all types of benefits from investors at the state-level. Three, since some of the benefits from the investment flow back to the investor it only improves the overall investment attractiveness of the country. And four, greater competition between states implies greater options and choices for the investor.

... contd.