Impact of Foreign Direct Investment on Economic Growth in India

Article excerpt

This study is concerned about foreign direct investment (FDI) and economic growth in India for the period of 1991-2009. This article produces fresh empirical evidence on the relation between FDI and economic growth obtained from Pearson's Coefficient of Correlation and Simple Linear Regression for India using variables like GDP, Exports and Imports. The results indicate that a positive and statistically significant estimate of correlation coefficient of FDI and GDP; FDI and Exports; and FDI and Imports. It is also supported by regression analysis.

Introduction

Over the last two decades, the determinants of economic growth have attracted increasing attention in theoretical and applied research. Despite the lack of a unifying theory, there are several partial theories that discuss the role of various factors in determining economic growth. Investment and human capital are the main source of growth in several endogenous growth models as well as one of the key extensions of the neo-classical growth model. Innovation and R and D activities can play a major role in economic progress increasing productivity and growth. This is due to the increasing use of technology that enables introduction of new and superior products and processes. Other determinants of economic growth are economic policies and macro-economic conditions. Economic policies can influence several aspects of an economy through investment in human capital and infrastructure, improvement of political and legal institutions and so on. A stable macro-economic environment may favour growth, especially, through reduction of uncertainty, whereas macroeconomic instability may have a negative impact on growth through its effects on productivity and investment.

Foreign Direct Investment (FDI) has recently played a crucial role of internationalising economic activity and it is a primary source of technology transfer and economic growth (Sahoo, Mathiyazhagan and Parida, 2002). FDI plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing for a host country or the foreign firms which received the investment, it can provide a source of new technologies, capital, processes, products, organisational technologies and managerial skills and as such can provide a strong impetus to economic development (Shiralashetti and Hugar, 2009). Bashir (1999) examined the relationship between FDI and growth empirically in some Middle East and Northern Africa (MENA) countries. The study found that FDI leads to economic growth; the effect however varies across regions and over time. Anita Ghatak and Ferda Halicioglu (2006) also agree that FDI has a positive spill over effects on economic growth and development. So, there are several determinants of economic growth and this paper has analysed the impact of FDI on economic growth in India.

After independence, the Government of India recognised FDI as an important supplement to domestic savings for the development of country and in 1972, government of India decided to permit wholly owned subsidiaries but due to restrictiveness of government policies, FDI remained remarkably low till the 1990s. A real trust is yet to begun with the announcement of the economic reforms measures taken since July 1991. The series of economic reforms have strengthened the economy and expected to assume a much larger role in catalysing Indian economic development (Lakhwinder Singh, 2007).

Reaching to changes in technologies, growing liberalisation of the national regulatory framework governing investment in enterprises and changes in capital markets, profound changes have accrued in the size, scope and methods of FDI. New information technology systems decline in global communication costs have made management of foreign investments and far easier than in the past. The sea changes in trade and investment policies and the trade policy and tariff liberalisation, easing of restrictions on foreign investment and acquisition in India and the deregulation and privatisation of many industries has probably been the most significant catalyst for FDI's expanded role. …