Academic journal article IUP Journal of Applied Finance

Trade Openness and Foreign Direct Investment in India: The Globalization Experience

Academic journal article IUP Journal of Applied Finance

Trade Openness and Foreign Direct Investment in India: The Globalization Experience

Article excerpt

Introduction

Globalization is a process in which an economy gets integrated with the rest of the world through trade, investment, and financial flows (Loots, 2002; and Nayyar, 2002). According to International Labor Organization (ILO, 2004), globalization not only brings growing interdependence in economic relations through trade, investment, finance and the organization of production globally, but also social and political interaction among organizations and individuals across the world. It is a total mindset in which the entire world becomes a single market such that the corporate strategy would be based on the dynamics of global business environment. Globalization is considered as a natural process of historical change and possible path for future world economy, which supposedly increases wealth and prosperity for all the countries around the globe. Though globalization is not something new, the integration of the world economy over the last 20 years has, however, been very dramatic. The experience of globalization in the post-1980s points that the process of integration has greater benefits in contributing to the economic growth and enabling some of the poorest countries in the world to catch up with the richer countries.

It is true that the decade of 1990s was eventful in terms of policy changes which have been taking place at three different levels such as global, national and sectoral. But the first and foremost development is globalization at the international level. It ensures closer integration of countries and peoples across the world, which has been brought about by enormous reduction of costs of transportation and communication, breaking down of artificial barriers to the flows of goods, services, capital, knowledge and, to a lesser extent, people across the borders (Stiglitz, 2002). But a startling development that has been taking place since the early 1990s is the free movement of capital, commonly through FDI, particularly from the developed to developing countries (Subrahmanya, 2004). As this went hand in hand with liberalization, this present study seeks to examine India's FDI inflows in the globalization era and its linkage with trade openness.

Globalization in India and Its Economic Impact

In India, it was only after 1985 that a shift towards liberalization started. But the active liberalization and globalization efforts were initiated with the economic reforms of the early 1990s (Kanda et al., 2001). The reforms have been initiated in various ways such as devaluation of rupee, dismantling of import license system, full convertibility on trade account, fiscal retrenchment and credit squeeze, abolition of export subsidies, introduction of import entitlement scheme for exporters, unification of the exchange rates, removal of the quantitative restrictions, massive reduction in the tariff rates and protection rates, and easing the restrictions on foreign investments. So far as India's performance is concerned during this era, the debate has become highly polarized. This is because there are two camps of scholars arguing in favor of and against economic reforms. While one group hails the achievements of the reforms and seeks faster implementation of other issues relating to the reforms agenda, the other group is critical about the reforms, focuses on the adverse effects and seeks rethinking on the coverage, sequencing and the pace of implementation. Both noteworthy achievements and failures have been, however, noticed (Wadhva, 2003).

Among the achievements, restoration of economic growth, stability in the inflation rate, favorable current account Balance of Payments (BOPs), increasing trade openness, mounting FDI inflows, strong foreign exchange reserves, public-private dichotomy, reduction of poverty, increasing human development, growing mass of educated people, integration of financial markets and booming stock markets are the most notable ones. The progress is not without failures, and consequently, the country also suffered some failures on other fronts. …

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