LINEAR AND NON-LINEAR GRANGER CASUALITY BETWEEN FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH: EVIDENCE FROM INDIA

Abstract

The present study tries to understand the association among Foreign Direct Investment (FDI) and Economic growth in India. This paper applies the causality test of Granger (1969) based on the VECM and non-linear causality test of Dike and Panchenko over the period 1993-2016. This study gives a proof about the continuation of a long-run equilibrium association between FDI and Gross Domestic Product (GDP) or Economic Growth for the period being investigated. Unidirectional causality runs from FDI to GDP in the long run. The apparent non-linear causality running from FDI to GDP means that FDI is a policy instrument in stimulating Indian economic growth and provides support for the bi-directional non-linear causal connection between FDI and economic growth with 1, 2 and 4 lags. There has been no definitive investigation as of recently to find “linear and non-linear” Granger causality between Foreign Direct Investment and Economic Growth in India” and this study goes a stage advancing and present exact models that can be used to find the association among Foreign Direct Investment and economic growth.