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