Analyzing foreign direct investment inflows to India: evidence from VAR-SVAR models

This paper investigates the impact of real effective exchange rates (REER), both in terms of levels and volatility, on foreign direct investment (FDI) inflows for a panel of 35 Indian sub-national economies over the period 2000-2013. In light of the asymmetric distribution of FDI inflows within India, we focus on examining the nexus between FDI inflows at the sub-national level and India’s competitiveness captured by REER. Our empirical analysis reveals that movements in REER have a significant and negative impact on FDI inflows, while REER volatility is found to be inducing FDI. Our results are suggestive that FDI inflows into India are largely domestic market oriented in nature. Purpose: In light of the asymmetric distribution of FDI inflows within India, we focus on examining the nexus between foreign direct investment (FDI) inflows at the sub-national level and India’s competitiveness captured by real effective exchange rates (REER). This paper investigates the impact of REER, both in terms of levels and volatility, on FDI inflows to 35 Indian sub-national economies over the period 2000-2013. Research Methodology: To examine the impact of REER on FDI inflows, we compile a panel dataset for 35 sub-national economies covering the time period 2000 to 2013. We employ panel fixed effects models to explore our relationship of interest between REER and FDI, controlling for other characteristics specific to a sub-national economy.Findings: Our empirical analysis reveals that movements in REER have a significant and negative impact on FDI inflows, while REER volatility is found to be inducing FDI. Our results are suggestive that FDI inflows into India are largely domestic market-oriented in nature. Originality/Value: Considering that India’s FDI inflows exhibit significant concentration patterns among selected regions, we exploit this heterogeneity at the sub-national level to empirically understand the determinants of FDI, with a particular focus on cost competitiveness as captured by REER. The extant literature has not explicitly focused on testing the impact of REER both in terms of its levels and volatility on FDI inflows to India at the sub-national level, especially not at the sub-national level. While admittedly the exchange rate varies only at the national level, the value-addition comes from understanding its interaction with state-varying macroeconomic indicators.

Empirical relationship between Foreign Direct Investment and Economic Variables of Pakistan

Most developing countries rely heavily on foreign direct investment (FDI) inflows for economic growth and stability. However, political risk and the foreign exchange rate could direly affect FDI inflows as investors seek stable markets. The most recent example of political risk interactions, the exchange rate and FDI has been the trade war between the United States (US) and China, where the US increased tariffs on Chinese goods worth over $16 billion. A crucial debate is needed regarding the importance of FDI inflows in developing countries, such as South Africa. FDI is observed as a crucial component in providing resources, and it is critical in facilitating globalisation and providing financial assistance to countries in need, especially developing countries such as South Africa. This study aimed to examine the long- and short-run effects of political risk ratings and foreign exchange rate fluctuations on FDI inflows in South Africa. The literature review provided evidence of long- and short-term relationships between political risk ratings, the real effective exchange rate, and the GDP's balancing variable on the dependent FDI inflows. The study utilised both the autoregressive distributed lag (ARDL) and non-linear autoregressive distributed lag (NARDL) models to analyse quarterly data from 1995 to 2020. The Variables included in the study were political risk, the real effective exchange rate, FDI inflows and GDP. The study revealed that political risk ratings and the real effective exchange rate have long-run effects on FDI inflows. The real effective exchange rate has an asymmetric long-run effect. It was also found that FDI inflows respond more to real effective exchange depreciations than real effective exchange rate appreciations, implying that the exchange rate is an important economic factor in explaining the investment inflows. Consequently, the study recommends that policymakers deploy responsive policy measures to deal with currency fluctuations and political instability. In South Africa, the negative effect of political risk affects FDI and impacts the overall country risk ratings and the country's ability to borrow. The study also recommends that further research be employed to understand other impacts on FDI inflows and the interaction of political risk and the real effective exchange rate on other critical economic factors.

Regional analysis of foreign direct investment in Lithuania

The purpose of this study is to empirically examine the dynamic impact of the stock of foreign direct investment (FDI) inflows on the aggregate income of The Gambia. In order to find the dynamic nexus, the ARDL model was used to capture both short-run and the long-run impact of FDI inflows. The result shows that FDI has a negative impact on income in the short-run. The bounds testing for cointegration showed that there is a long-run level relationship between income and FDI inflows, and the impact of FDI inflows on income in the long-run is positive. In order to examine the possible reason why FDI inflows have a different impact in the short-run and the long-run, the study empirically investigates how the interaction of FDI inflows and domestic investment affects income. The results showed that in the short-run FDI inflows crowded-out domestic investment and this led to FDI inflows to have a negative impact on income in the short-run. Moreover, the results also showed that in the long-run the FDI inflows complemented domestic investment and this led to FDI inflows to have a positive impact on aggregate income in the long-run. The conclusion drawn from this study is that the net impact of FDI inflows on the aggregate income of The Gambia depends on the degree of complementarity and substitution between FDI inflows and domestic investment.

This research extends Dunning’s investment development path theory to assess the long-run relationship among foreign direct investment (FDI) inflow, outflow and domestic investment (DI) for 32 emerging market economies (EMEs) based on 17 years data from 1996 to 2012. Breitung Panel unit root test has been used to identify the presence of unit root in the panel data. Since the FDI flows and domestic investments were found to be non-stationary at they were first differenced for converting to stationary variables. Based on Pedroni’s panel cointegration test a long-run relationship among DI, FDI inflow, and FDI outflow was observed indicating that the variables were integrated of order one. Further panel VECM was carried out to assess the causality and it was observed that a joint long-run causality was present both from FDI inflow and outflow towards DI. This essentially indicates that the FDI flows to EMEs will augment domestic capital formation. Therefore policy makers from the EMEs instead of focusing on standalone increase in FDI inflow should focus on both FDI inflow and outflow. However, in the short-run, DI was caused only by FDI inflow, and FDI outflow did not have any causal impact on DI. Further applying fully modified OLS (FMOLS) and dynamic OLS (DOLS) it was observed that FDI inflow and FDI outflow have crowding-in effects on DI. Hence, it can be concluded that for EMEs FDI outflow is also equally important in addition to FDI inflow to augment DI. The impact of 2008 crisis was also examined in the light of FDI outflows and inflows from EMEs. Results based on FMOLS and DOLS indicate that 2008 crisis negatively affected the FDI inflow but the effect on outflows was not statistically significant. These results advocate for a protection mechanism from the financial crises for the EMEs as the FDI inflow declined during the period. Further incentivizing the domestic firms investing abroad for technologies and synergies as FDI outflow also enhances growth.

This research investigates the effect of Financial Sector Development on the Foreign Direct Investment (FDI) inflows in Zambia. This study adopts a quantitative approach utilizing econometric modelling to analyze the relationship between financial development indicators and FDI inflows over a 32-year period from 1990 to 2022. Financial Sector development in this study refers to four key indicators and these are Credit to the private sector, Broad Money Supply, Stock Market Capitalization, and Gross Domestic Savings. The research employs various statistical techniques to ensure the reliability and validity of the results. Using the Vector Autoregression (VAR) model, the study evaluates the long-term and short-term effects of financial sector development indicators on FDI inflows. The results suggest that while domestic credit to the private sector is positively correlated with FDI inflows, the effect is statistically insignificant, indicating that credit accessibility alone does not substantially drive FDI in Zambia. In contrast, the broad money supply exhibits a significant negative correlation with FDI inflows, likely due to its association with inflationary pressures and volatile interest rates, which deter foreign investors. Such instability creates an unfavorable investment climate, causing potential investors to reconsider their commitment to entering or expanding in the Zambian market. Furthermore, stock market capitalization, which reflects the overall performance and robustness of the capital markets, demonstrates negligible influence on FDI inflows. The limited impact of stock market capitalization suggests that Zambia’s capital markets remain underdeveloped, characterized by low liquidity and limited investor participation. Similarly, the negative relationship between gross domestic savings and FDI may reflect a crowding-out effect, where local investors prioritize domestic investment opportunities over attracting foreign capital. This research underscores the necessity for targeted policy reforms aimed at enhancing financial development in Zambia. To enhance financial development and attract FDI, policymakers should focus on strengthening financial regulations to improve credit access, implementing monetary policies that ensure price stability, and fostering capital market growth through investment incentives and enhanced market transparency.

In this study, the long termed effects of foreign direct (capital) investments inflows and outflows on the economic growth of the economies of developed G-7 countries where the capital mobility is intense and selected emerging market economies (Brazil, China, India, Mexico, Russia, South Africa and Turkey (EME-7)) are empirically analyzed for the period of 1994-2015 within the scope of the new generation panel data methodology. From this aspect, it is also aimed to economically analyze whether the foreign direct investments inflows and outflows in countries of G-7 and EME-7 have an effect on the economic growth as is seen in the theoretical framework by being considered the capital exporter/importer positions of these countries. Determined in consequence of the study that foreign direct investments inflows/outflows in the countries of G-7 have a positive and statistically significant effect on economic growth in the long term. Also determined that the foreign direct investments inflows have a positive and statistically significant effect on economic growth in countries of EME-7; while the foreign direct investments outflows have not the same effect on the economic growth. These results which are consonant with the theoretical and empirical literature show that just both foreign direct investments inflows and outflows have a significant role in economic growth on G-7 countries; just foreign direct investments inflows have an important role in economic growth on EME-7 countries at the same time.

The majority of developing countries have heavily relied on foreign direct investment (FDI) inflows over the past years due to the gap between domestic savings and investment. Studies on the interactive effect of monetary policy and institutional quality (IQ) on FDI inflows are still scanty in East African countries. This study examined the effect of monetary policy (monetary policy rate (MPR), exchange rate (ER), reserve requirements (RR)) on FDI inflows in East African Countries with a special focus on the moderating impact of institutional quality. A fixed effect model was applied to analyse panel data spanning from 2003 to 2022. The results showed that incorporating institutional quality into the relationship between monetary policy and FDI inflows marginally improves the model's explanatory power from 56 percent to 57 percent with the interaction of IQ and monetary policy variables suggesting that institutional factors contribute to understanding FDI dynamics. The findings revealed a positive relationship between, IQ and MPR-IQ interaction and FDI inflows, though it was not strong. The results further showed a negative but weak relationship between ER-IQ interaction and FDI inflows. Thus, it is concluded that IQ slightly mitigates the negative impact of MPR on FDI, suggesting that strong institutions create a stable environment that offsets the deterrent effect of higher interest rates. Additionally, though IQ enhances stability, exchange rate fluctuations continue to undermine investor confidence. It is therefore recommended that Policymakers consider a holistic approach, focusing on structural reforms and stable macroeconomic policies to boost investor confidence and attract FDI.

This study evaluated the effect of regulatory quality (REQ) on foreign direct investment ‎‎(FDI) inflows in Nigeria and South Africa from 1996 to 2023. The specific focus of the ‎research is to ascertain: (i) what REQ have on FDI inflow to both countries; (ii) whether REQ ‎affects FDI inflows into the South African economy than into to Nigerian economy. ‎REQ index was sourced from the WGI database (2023), FDI inflows were sourced from the ‎World Bank database (2023), while exchange rate (EXR), inflation rate (IFR), and gross ‎domestic product growth rate (GDPG) were sourced from the Central Bank of Nigeria Statistical ‎Bulletin (2023). The study adopted the Robust Regression Analysis (RRA). This comparative ‎study evidenced that though REQ is a key FDI inflows driver in both countries, its effect is ‎more evident in South Africa than in Nigeria. Similarly, GDPG plays a more meaningful role ‎in enhancing FDI inflows in South Africa than in Nigeria. However, Nigeria is highly ‎sensitive to inflationary pressures and exchange rate instability compared to South Africa. ‎Consequently, the Nigerian government needs to prioritize stabilizing its macroeconomic ‎environment over other policies. To achieve this, the Nigerian government should reduce ‎inflationary pressures and manage its exchange rate volatility. There is also a need for the ‎Nigerian government to strengthen the REQ and ensure policy consistency will further ‎improve investor confidence. Meanwhile, the South African government needs to address its ‎structural issues, which may deter the country from enjoying the developmental benefits of ‎FDI inflows. Overall, government of both countries needs to adopt targeted reforms to ‎improve absorptive capacity, infrastructure development, and efficient capital utilization will ‎be imminent to enjoy the developmental benefits of FDI‎.

: This study examines the effect of global financial crisis (2007-2008) on foreign direct investment inflows' resilience to other capital flows to selected Sub-Sahara African (SSA) Countries. This study was motivated by the assertion that foreign direct investment (FDI) inflows to developing economies are resilient than other capital inflows in 2007-2008 global financial crisis that originated in developed world. Specifically, the study ascertained whether foreign direct investment (FDI) inflow is significantly resilient than foreign portfolio investment (FPI) inflow in SSA. Using panel datasets from 26 SSA countries, the study explored non-stationarity and heterogeneous – based dynamic panel estimators namely, Mean Group (MG) and Pooled Mean Group to empirically implement the objectives. The findings of the study amongst others revealed significant evidence of the resilience of the inflow of foreign direct investment to SSA during the global financial crisis period of (2007 – 2008), contrary to the wide-spread assertion that developing economies are immune to the impact of the crisis. Also, we found that the foreign direct investment (FDI) inflow is significantly resilient than foreign portfolio investment (FPI) inflows in SSA. This study recommends the policies that may stabilize growth of FDI inflows. Thus, more foreign investors should be attracted which should increase investment opportunities and growth in the region. Greater attention should be given to FDI whenever global financial crisis is experienced.

The purpose of this article is to look at the impact of foreign direct investment (FDI) inflows on economic growth in Barbados in the long and short run from 1979 to 2008 with the use of the Engle-Granger two-step procedure. The study shows that in the long run, a 1 percent increase in FDI inflows will expand economic growth by 0.10 percent while in the short run, the relationship between FDI and economic growth will be positive but almost flat. These results imply that any policy by Government aimed at boosting economic growth using FDI inflows will have to be considered for the long run since Government could not rely on FDI inflows in the short run.

Financial sustainability in emerging market economies crucially depends on stable foreign capital inflows as these countries lack adequate domestic capital and sophisticated technology. This study attempts to examine the impact of major political risk factors in the emerging market economies along with basic economic fundamentals such as institutional variables like per capita electric consumption, trade openness, and real rate of interest. We have followed a static panel data approach in studying the impact of these crucial variables in Foreign Direct Investment (FDI) inflows in 15 major emerging economies for the period 2000–2014. Risk perceptions, i.e., political risk data, have been collected from the International Country Risk Guide (ICRG) provided by the Political Risk Services (PRS) Group. In our research purpose, we have considered dependent variable as FDI inflows for 15 emerging countries during the period 2000–2014, which are drawn from the United Nations Conference on Trade and Development (UNCTAD, 2014, 2015) FDI database. Our results demonstrate that there are six subcomponents of risk perception (political risk) which are statistically significant in explaining variation in FDI inflows of the major emerging countries. The results show that government stability, socioeconomic conditions, religious tension, and bureaucracy quality have a positive impact on FDI inflows of emerging countries, whereas internal conflict and law and order have a negative impact on FDI inflows of these countries. Stable government is more attractive to foreign investors. Again, an improvement in the socioeconomic conditions is positively related with FDI inflows in emerging countries. Decreasing bureaucracy leads to a reduction in corruption, and assists expanding FDI flows in the emerging country.

Indonesia is a major player in the global nickel market, with the country's nickel exports accounting for a significant percentage of its total exports. Despite this, Indonesia has experienced fluctuations in its foreign direct investment (FDI) inflows in recent years. The purpose of this study is to explore the relationship between Indonesia's nickel export and FDI inflows. By understanding the dynamics of FDI in Indonesia, policymakers can better design policies that support economic growth and attract investment to the country. The study used time series data from 1990 to 2021, with the research objects being Indonesia and FDI. The variables analyzed included FDI, Percentage of Total Exports that are Nickel, Nickel Export Value, and Nickel Export Volume. The research method was the OLS regression method with multiple regression analysis, including unit root and classical assumption tests. The result of the study shows that the percentage of total exports that are nickel has a significant negative effect on FDI inflows, while Indonesia's nickel exports value and nickel export volume being positively significant influential factors on FDI inflows in Indonesia.

PurposeThis paper aims to examine how the volatility of foreign direct investment (FDI) inflows affects the volatility of corporate income tax revenue.Design/methodology/approachThe study has used an unbalanced panel data set of 129 countries over the period 1981–2016 and the two-step system generalized methods of moment approach to perform the empirical analysis.FindingsThe main findings are that FDI volatility enhances the volatility of corporate income tax revenue in less advanced economies, but reduces it in relatively advanced countries. The positive corporate income tax revenue volatility effect of FDI inflows is far higher in non-tax haven countries than in tax haven countries. Additionally, FDI volatility exerts a higher positive effect on corporate income tax revenue volatility as countries experience greater dependence on natural resources. Finally, the positive effect of FDI volatility on corporate income tax revenue volatility is further amplified by higher FDI volatility.Research limitations/implicationsOne important limitation of the present analysis is the use of aggregate FDI inflows because of the lack of data over a long period on greenfield FDI inflows and cross-border mergers and acquisitions FDI inflows. Therefore, an avenue for future research could be to explore separately the effect of the volatility greenfield FDI inflows and the volatility of cross-border mergers and acquisitions FDI inflows on the volatility of corporate income tax revenue, when long-time series data (covering many countries) would be available.Practical implicationsThese outcomes particularly shed light on the role of FDI volatility on the volatility of corporate income tax revenue, particularly in countries that are highly dependent on natural resources. Foreign capital flows, notably FDI flows, play an essential role for countries’ economic development through, inter alia, technology transfer, jobs creation and economic growth. Policymakers should aim to attract FDI, while also reducing their volatility, by designing and implementing policies and measures (such as those in favor of business environment improvement, property rights enforcement and political stability) that would assure foreign investors of the continuous high returns of their investments.Originality/valueTo the best of the author’s knowledge, this is the first time this topic is being addressed empirically in the literature.