Abstract
One significant feature of liberalisation for India has been a greater openness to foreign direct investment (FDI) as a means of acquiring technologies, skills and access to international markets, and of entering dynamic trade and production. The study analyses the empirical relationship between inward FDI, economic growth and exports of India from 1970-71 to 2013-2014. The objective of this article is to investigate the relationship between FDI, economic growth and exports empirically. The error correction coefficient value indicates a 15.02% movement back towards equilibrium following a shock to the model, one time period later. OLS indicate significant long-term causality relationship among the variables with high R2 value to the tune of 0.758660. The Wald Test establishes short-run causality from economic growth to inward FDI, and from exports to inward FDI. A one-way causality relationship is running from exports to inward FDI. Economic growth causes inward FDI, but, inward FDI is not causing economic growth. Exports cause inward FDI, and inward FDI does not cause exports.
Highlights
Foreign Direct Investment (FDI) occupies a special place in establishing a connection between economic development and globalisation
Maximum eigen statistics indicates two cointegration equation at 5% level of significance. This means that the three variables inward foreign direct investment (FDI), economic growth and exports have a long run equilibrium relationship among them
This phenomenon supports the theoretical explanations that there exists a formal long-run relationship between inward FDI and economic growth, the positive outcomes of this two particular phenomena is reflected through higher exports from India
Summary
Foreign Direct Investment (FDI) occupies a special place in establishing a connection between economic development and globalisation. The study analyzes the theoretical and empirical relationship between inward FDI, economic growth and exports of India, taking the time series approach. Purpose of this research is to study and empirically investigate relationship between inward FDI, economic growth and exports. Kholdy and Sohrabian (2005) investigate the interaction between financial markets, foreign direct investment, and economic growth using Granger Causality tests to a panel of 25 countries from 1975 to 2002. From the ADF test it is understood that the three variables, inward FDI, GDP and exports are non-stationary at levels (I (0)) and become stationary at first differenced (I (1)) This means their order of integrity is the same for all the three variables, which is a necessary condition for applying cointegration. Cointegration test is undertaken between inward FDI, economic growth and exports (see Table 1)
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