Economic Growth and Foreign Direct Investment: Empirical Evidence from India during Post-Economic Reforms Era

Authors

  • Dalbir Singh
  • Surat Singh

Abstract

The present study empirically investigates the causality between foreign direct investment (FDI) and economic growth in India over the period 1992-2014, the post economic reforms era. Gross Domestic Product (GDP) has been taken as proxy of economic growth in our study. The study takes into consideration the recent advances in econometric techniques. The study shows the high degree of correlation between GDP and FDI. The variables are tested for stationarity, applying Augmented Dickey-Fuller (ADF) test. The Co-integration test indicates that GDP and FDI are co-integrated time series showing long run equilibrium between the two variables under consideration in India during the study period. To determine the cause and effect relationship between economic growth (GDP) and FDI, Granger Causality test and Vector auto regression (VAR) model have been used. The results suggest that there is bidirectional causality between GDP and FDI. To check the long-run stability the Vector Error Correction Model (VECM) has also been used and the value of the error correction term (ECT) confirms the expected convergence process in the long-run for FDI and economic growth (GDP). The Variance Decomposition also authenticates the cause and effect relationship between GDP and FDI in India.

Keywords: FDI, GDP, India, Correlation, Stationarity, Co-integration, Causality, VECM. 

References

Pradhan, R P (2006) FDI in the Globalization Era: Chinese and Indian Economic Growth, Prajnan, 34: 323-343.

Vadlamannati KC, Tamazian A, Irala LR (2009) Determinants of Foreign Direct Investment and Volatility in South East Asian Economies, Journal of the Asia Pacific Economy, 14: 246-261.

De Mello, LR (1999) Foreign Direct Investment Led Growth: Evidence from Time Series and Panel Data, Oxford Economic Papers, 51 (1): 133-151.

Balasubramanyam VN, Salisu M, Dapsoford D (1996) Foreign Direct Investment and Growth in EP and IS Countries, Economic Journal, 106: 92-105.

Bende-Nabebde, A (2001) FDI, Regional Economic Integration and Endogenous Growth, Some evidence from Southeast Asia, Pacific Economic Review, 6(3): 383-399.

Zhang K H (2001) Does Foreign Direct Investment Promote Economic Growth? Evidence from East Asia and Latin America, Contemporary Economic Policy, 19(2):175-1.

Campos N F, Kinoshita Y (2002) Foreign Direct Investment as Technology Transferred: Some Panel Evidence from the Transition Economies, CEPR Discussion Paper 3417. London: Centre for Economic Policy Research.

Liu X, Burridge P, Sinclair P J N (2002) Relationships between Economic Growth, Foreign Direct Investment and Trade: Evidence from China, Applied Economics, 34: 1433-1440.

Wang M (2002) Manufacturing FDI and Economic Growth: Evidence from Asian Economies, Mimeo: University of Oregon Mimeo.

Chowdhury A, Mavrotas G (2003) FDI and Growth: What causes what? World Institute for Development Economics Research (WIDER) Conference on Sharing Global Prosperity.

Hsiao C, Shen Y (2003) FDI and Economic Growth: The Importance of Institutions and Urbanisation, Economic Development and Cultural Change, 51(4): 883-896.

Marwah K, Tavakoli A (2004) The Effects of Foreign Capital and Imports on Economic Growth, Journal of Asian Economics, 15: 399-413.

Li X, Liu X (2003) Foreign Direct Investment and Economic Growth: An Increasingly Endogenous Relationship, World Development, 33(3): 393-407.

Frimpong J M, Abayie E F O (2006) Bivariate Causality Analysis between FDI Inflows and Economic Growth in Ghana, International Research Journal of Finance and Economics, Issue 15.

Srinivasan P, Kalaivani M, Ibrahim P (2011) An Empirical Investigation of Foreign Direct Investment and Economic Growth in SAARC Nations, Journal of Asia Business Studies, Vol. 5, Iss: 2: 232-248.

Granger C W J (1969) Investigating Causal Relations by Econometric Models and Cross-spectral Methods, Econometrica, 35: 424–438.

Engle, R.F. and Granger, C.W.J. (1987), Cointegration and Error Correction Representation, Estimation and Testing, Econometrica, 55: 251-276.

Gujarati D N (1995) Basic Econometrics, 4th Edition, New York: McGraw-Hill.

Dickey D A, Fuller W A (1981) Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root, Econometrica, 49: 1057-1072.

Published

2018-01-06

How to Cite

Singh, D., and S. Singh. “Economic Growth and Foreign Direct Investment: Empirical Evidence from India During Post-Economic Reforms Era”. International Journal of Advances in Management and Economics, Jan. 2018, https://managementjournal.info/index.php/IJAME/article/view/70.