FDI Inflows in India: A Global Policy Period Analysis

Abstract

Previous studies most often viewed domestic FDI policy as the major influence on FDI inflows in a developing country. However, FDI needs to be understood in the context of international business because it relocates production internationally. This implies FDI cannot be isolated from international economic circumstances. Liberalisation, Globalisation (WTO), World Recovery and Global financial crisis are treated as different global policy periods in this study that have led to a lot of changes in international trade, investment flows and in the business environment. Hence, this paper attempts to fill the gap in the existing literature by modeling the global policy period wise impact on FDI inflows in India. The paper examines FDI trends in India during 1991-2013, using dummy variables to estimate the exogenous structural breaks, caused by different of global policy periods. It reveals there have been lots of variations in terms of FDI levels and growth rates during different global policy periods. Especially, after the pre-crisis bubble had burst there has been a drastic fall after Global Financial crisis, when for the first time the growth rate has become negative. The best period was liberalisation and world recovery period helped a lot in giving a boost to FDI. While FDI recession puts a premium on maintaining a welcoming investment climate, Indian policy makers should consider global policy keenly along with the improvement of domestic policy towards attracting FDI.