Estimating the Long-run Equilibrium among Foreign Direct Investment, Foreign Portfolio Investment and Economic Growth: The Case of Indian Economy

Abstract

Foreign institutional investment (FII) and foreign direct investment (FDI) play a vital role in the economic development of a country as these capital flows bridge the gap between the domestic savings and the amount required for achieving the targeted capital formation. This paper tries to study how these capital flows are helping India in enhancing the economic activities. It attempts to confirm the long-run and short-run relationship among the foreign direct investment, foreign institutional investments and Index of Industrial Production (IIP) in India during April, 2012 to March, 2020. Johansen cointegration test is applied to confirm the presence of long-run equilibrium and Vector Error Correction Model is applied to study the long-run and short-run properties of the variables. Finally, we have applied Impulse Response Function to understand the dynamic behaviour of the variables in the model.. It is found that the three variables- FDI, FII and IIP are cointegrated in the long-run. However, there is no causality running from FDI and FII to IIP as per the results of VECM Model.