FDI In India Research Articles

Do Exchange Rate and its Volatility Deter Foreign Direct Investment to India?

This paper investigates the impact of exchange rate levels and its volatility on Foreign Direct Investment in India using quarterly data for the period 1996:2 to 2010:1. The study employed autoregressive distributed lag (ARDL) bounds testing approach to examine the long-run and short-run relationship. Both conditional variance and other measures of volatility have been used to generate exchange rate volatility. The study also considered factors that motivate the foreign investors’ decision to invest in India. The results indicated that exchange rate volatility deters FDI in India, suggesting that flexible but stable exchange rate system may be needed to successfully attract FDI inflows in India.

Cherry-Picking or Lemon-Grabbing? Investigating FDI in Indian Manufacturing Firms

This article is a contribution to the literature that investigates the motives of foreign investors while investing in the domestic firms. We argue that in India, both positive and negative selection theories can be consistent in the backdrop of the asymmetry of information in foreign investment. Foreign investors seem to focus on observable variables like profit and stability over time to cherry pick their target firms. However, it appears that they invest in some firms that are lemons in other dimensions, such having low total factor productivity (TFP). These firms may also be attractive because they have the potential to be more productive. These findings are important to further investigate the role and nature of FDI in India.

FDI and its Relation with Exports in India, Status and Prospect in North East Region

After pursuing an inward looking policy of import substitution with public regulation in charge for more than four decades, India has adopted the New Economic Policy (NEP) in 1991 in the wake of economic crisis. The NEP has removed all sorts of biases against exports initiating reforms in the areas of international trade, investment, financial sector, and industrial and public sector deregulations. The flows of foreign capital are being welcomed. The East Asian experience has shown that the export-led growth strategies have been facilitated by FDI transferring into the host country technology, managerial and other expertise needed to exploit the country's comparative advantage. Against this back-drop, this study has three fold objectives. First, it investigates the trends of FDI in India during the period 1991-92--- 2010-11. Second, based on the yearly time series data, the relationship between FDI & manufactured exports has been examined for the same period by using the vector error correction model (VECM).The study found bi-directional causality between FDI and Exports. Finally, the paper depicts the present status of FDI & exports in North East Region (NER) with a focus on their prospect. The Look East Policy (LEP) of the govt. may benefit the region because of its strategic location. However, despite having natural advantage of trade with neighbouring countries and the potentiality to develop various industries as being endowed with vast natural resources, the NER fails to attract any sizeable amount of FDI due to infrastructural and other bottlenecks. The need is to remove such fundamental constraints through strategic intervention

An Analysis of Trends in Mobile Communication Services in India

The world is an ever growing one and would not be possible without telecommunications. The communication industry is one which connects all individuals and even machines through data to truly make the world a global village. The Indian mobile market has undergone a revolutionary change over the past few years to become one of the leading mobile markets on the global map. The telecom industry has enjoyed a significant upswing and is presently on a high-speed growth path, enjoying a growth rate of approximately 45% pa, among the highest in the world. This growth in the telecom sector has been facilitated by liberal policies of the Government has played a crucial role in attracting FDI in India. The paper aims to analyze the changing features of mobile communication services in India. The current technological advancements have caused a paradigm shift. The advent of 3G in India has brought with it a host of expectations not only by consumers but also service providers alike. As if this wasn't enough, Mobile Number Portability (MNP), which has been launched nationally, will further fuel the already strong wars between operators. This in turn will further consumer churn rate and enhance quality of service provided by operators. The paper provides an insight on the implication of these changes on service delivery of mobile communications and its influence on the continuously expanding subscriber base.

Canada and U.S. Outward FDI and Exports: Are China and India Special?

Using cross-country time series data for the period 1989–2001 we analyze the Canadian and United States' outward FDI and export performances, particularly to China and India. Casual examination of data may suggest that Canada is underperforming in its exports and FDI to China, but results from our econometric model do not support that conclusion. We found that Canada's FDI in India is lower than that predicted by the model. Interestingly, while the evidence that investors from the United States tend to invest more in the growing economies is quite strong, it is weak in the case of Canada. Although in-depth research is necessary to understand these differences, it is plausible that there are mismatches between the areas where investment opportunities are available in the fastest-growing parts of the world such as China and India, and the areas in which Canadians have comparative advantage. For example, financial services and mining constitute a big share in Canadian FDI abroad but these sectors are yet to be opened up in China and India. The U.S. FDI base is more diversified and better able to take advantage of the increased opportunities in fast-growing countries such as China and India.

Korean FDI in India: Perspectives on POSCO-India Project

This paper reviews the dynamics of POSCO-India project, a combined “mine-steel plant-port” project in Orissa, India during the last five years. In contrast with the market oriented FDI undertaken by Korean companies like LG, Samsung, HMI in India, POSCO-India project is a natural resource seeking FDI that has faced hurdles from the very beginning in setting up its integrated steel plant. Especially there has been strong protest against this Korean project from the prospective displaced persons. The main reasons for the delay in the project are the failure to build local political consensus on the project, regulatory complexities, dispute on government record on the land, and compensation. We conclude that it is important to recognize the difference between the market oriented FDI and resource seeking FDI like Posco-India project. In this regard, the reasonable and fair compensation for the affected peoples is essential. Creating sustainable new employment in the relocation zone is necessary as well. Framing of socially responsible resettlement policy and fostering of local consensus on the cost and benefits of resource seeking FDI projects can be useful in expediting the implementation of such projects.

Location of FDI in India: Some Less-explored Aspects

While there has been extensive research to identify the factors which influence FDI's choice of host countries to invest in, considerable interest is also being attached to location of FDI establishments within specific countries. In India too, a few studies focused on the distribution of FDI in different states. Most of these were, however, based on aggregate FDI and that too of approvals only. Even those attempted at some level of disaggregation do not take note of specific characteristics of FDI like modes of entry, nature of the foreign investor, sector of investment, characteristics of local partner if any, etc. Since mid-2000s even this information is not available and it has become more difficult to identify FDI flows/establishments in different states. Based on India's experience since 1991, this note seeks to underline the need for disaggregated analysis which takes into account investor/sectoral characteristics, mode of entry, size of investment, etc.

The Effect of FDI on India and Chinese Economy: A Comparative Analysis

India and China are the two emerging economic giants of the developing world, both situated in Asia with 37% of world population (Asian Development Outlook2005) and with more than 9% growth in their respective GDP of their economies (World Development Report 2006). China got independence in 1949, after 2 years of India's political Independence (1947), but today, China has surged far ahead of India in socio-economic development indicators. The FDI in India is just 3.4% of FDI flows as a percentage of Gross Fixed Capital Formation in India by 2004 and 5.9% of FDI stocks as a percentage of GDP by 2004, whereas in China it was 8.2% of FDI flows as a percentage of Gross Fixed Capital Formation and 34.9% of FDI stocks as a percentage of GDP during the same year. In order to estimate the effect of FDI on economic growth the model formed is Y = A X1 a X2 b X3 y X4 x. The 't' ratio for the constant (a), GDI(x1), HC (x3), LF (x4) all are greater than two implying the strong significance of these variables on the GDP, but FDI is showing positive, but not relatively significant effect on GDP. The R2 for the model as a whole is 0.93, the F value is significantly high revealing the significance of the fitness of the model. The D-W Statistics for the model is 1.825 revealing, the problem of auto-correlation has been fairly solved. The model shows that 1 percent increase in GDI leads to increase in GDP by all most 0.5 percent. The 1% increase in FDI brings about an increase in GDP by 0.12 percent. The coefficient for human capital is 0.34 percent and that of the labour force is 0.7 percent. Thus GDI and HC significantly affect the GDP. However the coefficient of FDI though not significant as other variables in the study, is positive.

Foreign direct investment in India with special focus on retail trade

It is to be noted that there is prevalent widespread opposition, specially by the left parties towards FDI in retail trade in India. May be in the early 1990s employing safeguards to protect domestic retailers was the need of the day. Almost more than one and a half decades down the line there is a need for Foreign Direct Investment in retail trade. It is a flawed argument that the Wal‐Marts’, Tescos’ and Asdas’ will lead to the winding up of the small scale domestic retailers. Instead it is going to provide a stiff competition to the Pantaloons’ and the Westsides’. This paper starts by stressing the need of FDI in India. It uses the argument that FDI is allowed in multiple sectors and the effects have been quite good without harming the domestic economy tries to stress on the fact that FDI in retail sector must be allowed.

Labor Conflict and Foreign Investments: An Analysis of FDI in India

AbstractThis paper analyzes patterns of foreign direct investment in India. We investigate how labor conflict, credit constraints, and indicators of a state's economic health influence location decisions of foreign firms. We account for the possible endogeneity of labor conflict variables in modeling the location decisions of foreign firms. This is accomplished by using a state‐specific fixed effects framework that captures the presence of unobservables, which may influence investment decisions and labor unrest simultaneously. Results indicate that labor unrest is endogenous across the states of India, and has a strong negative impact on foreign investment.

The Determinants of Foreign Direct Investment in India

India has implemented far-reaching economic reforms since it adopted a market-oriented open door policy in 1991. The current paper examines how changes in the macroeconomic condition have influenced inward FDI in India. The empirical evidence derived through vector error correction estimations show all three macroeconomic variables-national income, wage, and tariff races-form a statistically significant and stable long-run equilibrium relationship with FDI inflows. FDI inflows are revealed to be positively related to market size. In contrast, wage levels and tariff rates have negative effects on FDI inflows, implying chat less protection stimulates more FDI in India. Finally, albeit the existence of a structural break in the model between 1992 and 1993, the influence of economic reform on FDI inducement was not statistically significant.

Foreign direct investment in India: Policy reform and politics

India has recently attracted much attention as a favoured destination for foreign investors. Recent changes in a wide range of policy areas, a clear and unambiguous message from the top leadership about India's need for FDI, and the government's commitment to encourage such inflows, along with India's increasing integration with the global economy have, arguably, contributed to this changed perception about India. While successive governments have made changes in policies in various FDI‐related areas in the past five years, policy change in India continues to be a gradual process. The current policy process, while more ambitious than before, thus continues to be tempered by the various political forces that shape the debate on, and the policy‐making process for, entry of FDI in India.

Labor Conflict and Foreign Investments: An Analysis of FDI in India

This paper analyzes patterns of foreign direct investment in India. We investigate how labor conflict, credit constraints, and indicators of a state’s economic health influence location decisions of foreign firms. We account for the possible endogeneity of labor conflict variables in modeling the location decisions of foreign firms. This is accomplished by using a state-specific fixed effects framework that captures the presence of unobservables, which may influence investment decisions and labor unrest simultaneously. Results indicate that labor unrest is endogenous across the states of India, and has a strong negative impact on foreign investment.

Low Bargaining Power of Labour Attracts FDI in India

There have been a lot of studies on FDI and the determinants for its flow. It is normally argued that low capital-output ratio and high labour productivity are the two attractive reasons for the flow of foreign direct investment. It is also commonly held that high wage is a deterrent to the flow of FDI. In this paper, however, it is shown with the data available in Indian context, that the increasing trend in the absolute wage of the worker, contrary to common belief, does not deter the increasing flow of FDI. To explain this intriguing phenomenon the authors have considered in this paper the ratio of the wage to the value a worker adds. It is found with the available Indian data that this ratio is declining though the absolute wage is increasing. It is this decline in the ratio that correspondingly promises more return on the capital invested and therefore is held as an important reason for the flow of FDI, notwithstanding the increase in absolute labour wage. This ratio, in this paper is taken as a definition for the measure of the bargaining power of labour. The study undertaken in this paper implies that the bargaining power of the labour cannot be ignored as a determinant for the flow of FDI.

Indian Federalism, Economic Reform and Globalization

In this paper we examine several dimensions of economic reform in India, in the context of the country’s federal system and of globalization, i.e., we explicitly recognize that the national government has subnational governments below it, and that all these layers of government simultaneously interact with foreign governments and corporations in a global economy. We examine two groups of reforms, the first involving redrawing of state-market boundaries, and the second concerned with reconfiguring federal institutions themselves. The first group includes financial sector reforms, assignment of regulatory powers, infrastructure reform and development, and privatization. We note the progress made in financial sector reform but also the problems caused for the financial sector as a whole by state and central fiscal deficits. We discuss the extreme problems of the power sector, and the important federal dimensions that make reform more difficult there. We also highlight the regional concentration of FDI in India’s more liberalized economy. The second group of reforms includes tax reforms, reform of center-state fiscal transfer mechanisms, and local government reforms. To some degree, these reforms in federal governance hold the key to opening the door to further reform elsewhere, by reducing the fiscal burden placed on the private sector by government deficits. We acknowledge the political economy aspects of reform of governance, and discuss possibilities for politically acceptable packages of fiscal reforms, such as combinations of changes in tax assignment that would be acceptable to the center as well as the state governments. We also discuss the possibility that growing regional inequalities might require the intergovernmental transfer system to be more efficient and effective in its objectives.

Foreign direct investment and growth in India: a cointegration approach

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.