Academic journal article IUP Journal of Applied Economics

Causality between FDI Inflows and Export with Reference to India: An Analysis

Academic journal article IUP Journal of Applied Economics

Causality between FDI Inflows and Export with Reference to India: An Analysis

Article excerpt

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The relationship between Foreign Direct Investment (FDI) and other macroeconomic variables has been an attractive area of study for researchers and academicians. FDI plays a vital role in boosting the economy since it brings in capital to certain sectors and then multiplies the amount, which is further invested for industry mobilization. FDI is investment made by foreign countries in other countries. FDI can be horizontal, vertical or platform. Singh et al. (2012) suggested three forms of FDI in India, namely, joint ventures, acquisition of assets and green field ventures.

India has already marked its presence as one of the attractive destinations for the foreign investments and one of the top three destinations for FDI. India's growing GDP, geographical location and diversified business are some of the factors which attract foreign investment to the country. FDI plays an important role in promoting the growth of the country. Productivity enables the host countries to increase their export by way of FDI through increasing capital, expertise and managerial skills (Sultan, 2013). FDI also helps in promoting export by way of entering into new and novel markets. In India, various sectors have been opened for FDI such as telecom sector (100%), single brand retail (100%), credit transformation (up to 74%), asset reconstruction companies (100%), and defence sector (49%). Some of the sectors however are restricted for FDI; for example, gambling and betting (including casinos, etc.), chit funds, trading in Transferable Development Rights (TDRs), etc.

FDI - An Overview

FDI is one of the key macroeconomic variables in Indian economy. It has helped to a great extent in achieving the stability and development in Indian economy. After the (Liberalization, Privatization and Globalization) LPG policy, there has been considerable growth in the GDP of Indian economy. FDI has helped Indian economy in many ways such as providing employment, pr oviding capital for further investment, a nd providing expertise and infrastructure such as tools, raw-materials, machines, etc. (Agarwal et al., 2012).

The introduction of FDI can be associated with the establishment of East Indian Company of Britain in India. The British colonists brought capital to the country in order to conduct business since India was a hub of resources at that time. The exact history of FDI cannot be traced due to unavailability of authentic data. British companies established their business in different sectors such as mining and textiles, due to abundance of resources. After India gained independence, the policy makers of the economy focused on the concept of foreign capital. For example, the Industrial Policies of 1956, 1965 and 1991 gave importance to FDI in India. With the opening of the Indian economy in 1991, the government became liberal in allowing foreign participations in some of the sectors. The government has made some the sectors licence free to attract maximum foreign participants. Many of the sectors became 100% FDI. Such an attitude of the Indian government towards the participation of private and foreign players motivates many players from the developed countries such as USA, Japan, and European Union, to invest their capital in the attractive and lucrative sectors of India. The Foreign Investment Board was set up to manage and register the companies. The Foreign Exchange Regulation (FERA) Act was also enacted to look after the regulatory aspects of foreign capital and reserves in India.

The Government of India has also established the Foreign Investment Promotion Board (FIPB) whose main objective is to facilitate the foreign capital through single window. Basically there are two routes for foreign investment in India. First is Automatic route under which no government permission is required, and the second is Government route under which applications are accepted as per FIPB. …

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