An Empirical Investigation of India’s Outward Foreign Direct Investment: A Macro Perspective (original) (raw)
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SSRN Electronic Journal, 2012
Foreign direct investment (FDI) has boosted financial stability, growth and development in India. There has been positive growth rate in GDP since FDI in India has been allowed. FDI has also acted as the resistor during global financial crisis 2008. Many pull factors in India have attracted FDI which include rapidly expanding consumer market, easy access to other neighbouring countries, accessibility to cheaper basic inputs, well-developed and stable banking system and favourable policies for foreign investors, etc. This article attempts to find out the existence of relationship between FDI and six macroeconomic factors-Exchange rate (` per $), Inflation (WPI), GDP/IIP (proxy for Market size), Interest rate (91 days T-bills), Trade Openness and S&P CNX 500 Equity Index (profitability) using monthly and quarterly data for the period starting from July 1997 to December 2011. Apart from using the standard techniques, such as ADF and PP Unit root stationarity test, Bi-variate and Multi-variate Regression analysis and Granger Causality test, we have also applied advanced econometric techniques such as Johansen's cointegration test, Vector Auto Regression (VAR) and Impulse Response analysis to check for long-run and short-run dynamic relationship. The results show a significant correlation between FDI and all macroeconomic variables (except for Exchange rate). Causality results show that IIP/GDP, WPI and S&P CNX 500 Equity Index are Granger causing FDI inflows in India while Trade Openness is Granger caused by the same. All the macroeconomic variables taken in the article (except exchange rate) are significantly affecting FDI inflows and the overall explanatory power of the regression model (i.e., Adjusted R square) is 75.7 per cent. The results of Johansen's cointegration test disclose that there is long-run causal relation between FDI and IIP; FDI and S&P CNX 500 Equity, FDI and Trade Openness and FDI and WPI. VAR and Impulse response function analysis show that FDI is caused more by its own lagged values rather those of other macroeconomic factors. These results are important for policy makers, regulators and foreign investors. Policy makers and regulators are required to push reform agenda in domestic market for attracting huge FDI inflows in the country. Foreign investors want the policies of the country to be stable and transparent to provide enough safeguard for their investments because instability increases the risk to the foreign investors. Since, we find positive relationship between FDI and profitability, a higher investor's confidence in domestic market acts as a stimulus in getting more FDI inflows.
The Determinants of India’s Fdi Inflows: The Bound Test Analysis
Humanities & Social Sciences Reviews
Purpose of the study: This paper aims to empirically examine the determinants of FDI inflows which include policy factors along with macroeconomic aggregates prevailing in India that serve as an important factor for attracting FDI in the country. Methodology: This paper has applied the Auto Regressive Distributed Lag (ARDL) modeling technique to empirically examine the co-integration relationship among FDI inflows and various macroeconomic aggregates prevailing in India to determine the factors affecting the flow of FDI in India. Main Findings: The study finds that there exists a co-integration relationship between the variables in the model. The estimated coefficient reveals that FDI inflows in India are positively influenced by trade openness, domestic investment, moderate domestic prices and exchange rate in the long-run. The outcomes also reveal that FDI inflows are positively influenced by the past level of FDI inflows, the past year of GDP per capita, past level of trade openn...
Do the macroeconomic indicators influence foreign direct investment inflow? Evidence from India
Theoretical and Applied Economics, 2020
This study significantly contributes to the growing literature on the dynamic link between FDI inflow and macroeconomic factors like inflation, trade openness, market size, and exchange rate in the case of India. An Autoregressive Distributed Lag bound testing approach with annual time-series data from 1975 to 2017 employed for modelling the short-run and long-run dynamics. Using Wald coefficients, the study found integration between the variables. It further discovered that variables are correcting the shock-induced disequilibrium at a speed of 86%. In the long-run trade openness and real gross domestic product positively affect the FDI inflow, whereas the exchange rate and inflation are negatively associated with FDI inflow. However, the study failed to detect any short-run association among the variables. Based on the findings, the research suggests better management of inflation and exchange rate volatility through specific policy action for attracting more global capital to the...
Global Journal of Management and Business Research, 2012
The present study tries to establish a causal relationship between the nominal exchange rate and foreign direct investment in India using a time series data between 1992 and 2010. It tries to understand whether the fluctuation in the exchange rate in turn causes the change in the quantum of foreign direct investments inflows and vice-versa which is of enormous importance in the wake of unprecedented depreciation of Indian Rupee against US dollar. Our analysis uses unit root test and Johenson cointegration test to show whether the variables under consideration exhibit stationarity and a long run association respectively. The test indicates absence of any long term association between the two variables under consideration. In the present context it appears that the data is not stationary at level and is stationary at first difference. The Vector Auto regression (VAR) model depicts that the coefficients do not have any long run association.
Impact of Foreign Direct Investment on macro Economic Parameters of India: AN empirical analysis
, which leads to the globalization of an economy. The globalization over the last two decades has been hailed as a major development, which result in economic prosperity in developing countries. The present study analyses the impact of FDI on some macroeconomic indicators in India. Explanatory variables used in the study are Gross Domestic Product (GDP), Foreign Exchange Reserves (RES), Gross Capital formation (GCF), Exports (EXP), Employment (EMP). The technique of Cointegration has been applied to investigate the impact of FDI on the economy of India. Augmented Dickey Fuller (ADF) test and Philip Parron test have also been applied to check the stationarity of data series. Empirical analysis concludes positive and significant impact of FDI on GDP, GCF, EXP, EMP and RES. The value of X coefficient shows a trend from 0.065to 0.634 in India. The minimum variation due to FDI is found out in case of EMP (0.065%) and maximum in Reserves (0.634%).
Abstract: The paper endeavour to explore the short run and long run causal relationship between select macroeconomic variables (GDP, Exchange Rate & Inflation Rate) and FDI inflows in Indian context by applying Cointegration test followed by Vector autoregression (restricted/unrestricted) model and Granger-causality test. Further, by employing simple regression model, it tries to calculate the exponential growth rate of FDI inflows in India. Eventually, Chow test has been employed to detect the presence of significant structural break in the data series of FDI inflows. However, the results show that there prevails long run equilibrium among the concerned variables. The Granger-causality test results conclude that exchange rate and GDP statistically significantly influence FDI, whereas, inflation rate is insignificant variable to predict FDI inflows. Further, the growth analysis result claims that the total FDI inflows grow exponentially at a rate of 23% per annum. However, as stated by the results of Chow test, 1991-92 (the year of initiation of New Economic Policy in India) is a statistically significant structural break year in the context of FDI inflows in India. Keywords: FDI, New economic policy, Unit root test, Cointegration test, Vector error correction model, Granger-causality test, Structural break, Chow test.
India's outward foreign direct investment: the home-country economic perspective
International Journal of Comparative Management
The paper examines the impact of home-country macroeconomic factors such as gross domestic product (GDP), money supply and inflation on the growth of outward foreign direct investment (OFDI) from India. Vector error correction model is employed to explore the long-run dynamics and short-run causality between the macroeconomic factors and OFDI for the period 1980-2014. The study finds that GDP has positive and significant impact on OFDI whereas money supply and inflation have significant but negative impact on it in the long-run. However, in the short-run, no causality is witnessed between OFDI and macroeconomic factors specified in the model.
Revisiting FDI Led Economic Growth Hypothesis in India an Autoregressive Distributed Lag Approach
Saudi Journal of Economics and Finance
The aim of this study is to revisit the relationship between foreign direct investment (FDI) and economic growth. The motivation behind this study is that there is ambiguous evidence across countries on FDI and economic growth. However, there have been many studies conducted across countries but there is a scanty literature available on FDI and economic growth in India. The relation between FDI and economic growth is vague. Therefore, this study is an addition to all previous studies, try to posit the relationship between economic growth and FDI. Energy consumption has been taken as a control variable into consideration. The study has covered time-series data from 1990 to 2019. The ARDL bound test approach has been employed to confirm the cointegration among the variables. The bound test confirmed the existence of a long-run relationship between FDI and economic growth. The error-correction term negative sign indicates that there is a divergence between dependant and independent var...
An Econometric Analysis of Foreign Investment Flows into India
Indian Journal of Economics and Development, 2018
Objectives : To look at the determinants of foreign investment inflows into India and further to see its inter-dynamic relationships with macroeconomics fundamentals in India. Methods/Statistical Analysis : The study was done for the period of 1996 Q1 to 2017 Q2, using the secondary data from RBI handbook of statistics. Augmented Dickey-Fuller test was employed to check the stationary of the data. Regression analysis was employed to look at the determinants of foreign investment flows into India and Vector Auto-regression model was used to look at the inter-dynamics between foreign investment and macroeconomic fundamentals in India. Findings : Looking at the causal relationship between GDP and FINV, we found it is unidirectional from GDP to FINV. Thus we can infer that robust economic growth in India attracts FINV. The study found that GDP, BSE Sensex, EXC, INF, ROI, and CAD are the major determinants of foreign investment in India. GDP, BSE Sensex, and ROI have a positive impact an...
Journal of Global Economy, Trade and International Business, 3(1), 1-20, 2023
There is evidence that foreign direct investment promotes growth in developing economies. At the same time, economic development also attracts FDI. Further, FDI inflows may also induce investment by national investors. In order to analyse the effect of FDI inflows on economic growth and domestic investment in developing countries, this paper has applied the vector autoregressive model for five Asian countries-India, Malaysia, Pakistan, Sri Lanka and Thailand-for the period 1980-2020. In the VAR framework, the relationship between GDP, FDI, exports, infrastructure and population growth are estimated endogenously by taking two-period lags of each of these variables. The estimated VAR results show that there is a positive impact of FDI on growth in these economies, except Pakistan, and the infrastructure facility is an important factor in attracting FDI. The impact of FDI inflows on domestic investment in India is significantly positive, with a more than twofold increase in investment by national investors.