Analysis of India Outbound FDI Determinants Using Gravity Model Approach

Abstract

Foreign Direct Investment (FDI) has emerged as an important factor in the economic growth of nations worldwide. In the context of developing and transition economies, FDI does not only serve as a source of finance for economic development, but also acts an interactive face of Multinational Enterprises for export and deployment of capital assets thereby boosting the home domestic markets. In developing economies like India, both inward and outward FDI investments have shown a tremendous increase in the recent decade. Though various researches have been conducted to examine the patterns of and factors affecting inbound FDI investment, we find a significant research gap in relation to the trends and determinants of Outward FDI (OFDI) particularly in the context of macroeconomic indicators like GDP and GFC. We, therefore examine the determinants of Indian OFDI using a gravity model approach applied to investments made in selected European countries that account for the major share of OFDI for a period of 2011–2016. Results indicate that all selected macroeconomic variables have a significant influence on OFDI. Also, the need for Natural Resources, Market Size and Openness and Technology seeking motives are the key determinants of Indian OFDI to European nations.