Assessing the Long-Run and Short-Run Relationship between Macroeconomic Variables and Foreign Direct Investment Inflows in India

Abstract

Foreign Direct Investment has an unfathomable contribution in the growth of the developing economies like India. Foreign Direct Investment generally referred as FDI involves long term relationship, lasting interest and control. The World Bank defines it as “net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.” Therefore, it is not only an important source of foreign savings to an economy but also synergistically contributes in the economic growth and development by passing on technological advances, entrepreneurial and managerial expertise, know-how assistance, market access and the likes. Therefore, tangible and intangible benefits offered by FDI inflows can collectively contribute in sustainable economic growth and development of India. The association between macroeconomic variables and FDI has become imperative over the past few decades. Further, many studies across the globe have proved that there is a direct or indirect relationship between Macroeconomic Variables and Foreign Direct Investment. Therefore, this paper attempts to explore the causal relationship between selected macroeconomic variables and FDI Net Inflows in India by using econometric analysis. The paper also endeavors to assess the short term and long term relationship between the selected variables using annual data over the period of 1980to 2013.