REDEFINING BUSINESS VISION-ISSUES AND CHALLENGES
VOL-1:ACCOUNTING AND FINANCE
Edited by –Sanjib Kumar Basu,Soumya Saha,Sumanta Dutta
Regal Publications,F-159,Rajouri Gardens,NewDelhi-110027
The book is the outcome of the presented papers in the one day seminar organized by Department of Commerce of St.Xavier’s College,Kolkata in collaboration with University of Calcutta sponsored by UGC
Held on 19March,2016.It includes a comprehensive coverage of all the issues relating to accounting, and finance and volume-2 covered marketing and human resources.
The contains of the book is as follows.
1] Forensic Accounting:Its role on Fraud Detection(with reference to White Collar Crimes in India)-Hanzala Awais and Priyodarshini Rasquinha
2] Voluntary Disclosure of Corporate Environmental Practices,Corporate Governance and Market Responsiveness:A Longitudinal Study in Indian Context-Abhijit Roy and Sumanta Kumar Ghosh
3]Impact of Companies Act,2013 on Depreciation and its Reporting:A Study of Selected Indian Companies-Abhik Kumar Mukherjee and Subhra jyoti Mondol
4]Impact of IFRS on Voluntary Adopted IT companies in India:A case study of Infosys Ltd,and Wipro Ltd—Malay Ranjan Mahapatra
5]E-Governance Initiatives of Government of West Bengal:A study on its utilization—Uttiya Kar
6]Profitibility position of the commercial banking sector in India:An empirical study on public and private banks—Manidipa Das Gupta and Som Sankar Sen
7]Business Trust in India:A look into its Tax Implication—Prof.Shubhayan Basu
8]Business ethics and corporate social responsibility:Two emerging issues of corporate sectors in India—Suvankar Chakraborty
9]FDI inflows and economic growth in India:A Fusillade of questions-Souvik Mukherjee,Tanusree Das,and S.Kavitha
10]Interpretation of customer perception about life insurance:A study of south Delhi area—Monirul Islam
11]Economic growth,foreign direct investment and financial crises—Debesh Bhowmik
12]India’s economic performance during the pre and post crisis period:A comparative Analysis—Rajib Bhattacherjya
13]Investment in money instrument and precious metals in different economic phases in Indian context—Sharmistha Ghosh and Tumpa Chakraborty
14] Comparative study of TATA steel Ltd and SAIL in terms of liquidity and its relation with profitability—Palash Bandopadhyay and Priyanka Agarwal
15] Tail Risk Behaviour of the Indian banking sector in the context of financial crisis of 2007-08—Piyali Dutta Chowdhury and Basabi Bhattacharjya
16]Financial inclusion:A qualitative critique of recent finiancial reform—Joyita Banerjee and Hanzala Awais
17]Exchange rate exposure and its determinants on stock returns at firm level around crisis periods:A study of India from 2000-2013---Soumya Saha
18]A study on Asset liability management as risk management technique in commercial banks in India—Khushboo Thakkar
19]A study on increasing trend of NPA on self help group bank linkage programme—Mithun Das
20]A study on primary market pricing in conflict with behavioural finance approach-Investors biasness---Sunita Ghatak
21]Financial inclusion through mobile banking :How much merit does it carry?—Debabrata Jana and Abhijit Sinha
22]Inclusion through microinsurance:A case study of Nadia District,West Bengal---Sreemoyee Guha Roy.
My paper—Article no-11,pp167-195
Economic Growth, Foreign Direct Investment and Financial Crises
(Retired Principal and associated in International Institute for Development Studies, Kolkata)
Key words- Foreign Direct Investment, economic growth, financial crises,currency crisis,banking crisis,sovereign crisis
Foreign Direct Investment has several dimensions. It affects host countries balance of payments and development process. It has long run effects on economic growth and sustainable development which depend on the character of FDI. However, the nexus between growth and FDI is indeterminate since it varies from region to region, country to country and from period to period although the globalization, liberalization and privatization drives accelerated the speed of the nexus towards positive direction irrespective of the distribution of income. Historically, FDI changes from merchants’ capital to multinational investments, from imperialistic attitude to trade domination through economic integration (via financial integration) in international trade and finance.
FDI does not cause crises directly, but it has indirect causes of bubbles and busts. Debt finance through FDI may stimulate debt burden under recession. Financial and banking crises may emerge if FDI in banking sector find losses and shut downs. Yet we cannot avoid the fact that FDI does not Granger cause of financial crises but financial crises do Granger cause FDI changes which were observed in all the financial crises in the world .
Since the Baring crisis in 1870, India’s FDI was dominated by British imperialism through East India Company whose chief competitors were Dutch East India Company, Danish East India Company, Portuguese East India Company, French East India Company and Swedish East India Company respectively. In 1913, India’s foreign investment stood 35% of GDP and per capita foreign investment was 6 dollar at 1900 US dollar and foreign direct investment as percent of domestic capital stock was 9% and FDI as of GDP is 19.39% in 2014.The highest share was occupied by Mauritius,36%, followed by Singapore,12%,UK ,10%,Japan,8%,and USA,6% respectively. Service sector is leading the sectoral distribution of FDI ie 18%, followed by construction development,11%,telecommunication and computer ,6% each, and drug and pharmaceuticals, 5% respectively in 2013-14 .
This paper will endeavour to verify nexus between FDI and growth in Indian economy using econometric analysis and studied analytically the changes of FDI during crises.
II. Literature review
The nexus between Growth and FDI inflows varies from country to country, from one period to another and from one sector to other in which there are many economic literatures that represent economic relevance. Ragimana(2012) studied that FDI growth nexus is positive in Solomon Island during 1970-2010 which was verified through Granger Causality test and Co-integration test. Adelake(2014) found that FDI has positive overall effect on economic growth in Sub-Saharan Africa, although the magnitude of this effect depends on some country specific features during 1996-2010 of 31 SSA countries of panel data where role of governance should positive on encouraging FDI inflows. Tintin(2012) showed that FDI spurs economic growth and development in developed ,developing and the least developed countries which was found from the study of a sample of 125 countries (38 developed,58 developing and 29 least developed countries) over the 1980-2010 period by using least square method of the panel data. Stehrer and Woerz(2009) verified the relation in OECD and non OECD countries during 1981-2000 and found that a 10% increase in FDI can increase 1.2% in growth rate per year. Li and Liu(2005) studied 84 countries using data of 1970-1999 period and concluded that a 10% increase in FDI can stipulate 4.1% growth rate per year. Johnson(2006) took 90 developed and developing countries using data of 1980-2002 period and concluded positive relation through OLS method. Ewing and Yang(2009) studied 48 states in USA during 1977-2001 in manufacturing sector and found direct relation between growth and FDI. Hansen and Rand(2006) used co-integration and causality tests in 31 developing countries during 1970-2000 and showed positive relation.Herzer et.al(2008) verified the nexus in 28 developing countries during 1970-2003 and found positive nexus. Nair (2010) showed that FDI has a positive and highly significant effect on overall growth in India during 1970-2000 in regression results which leads to an increase in market size.The result proves that it cannot be rejected that the FDI does not Granger cause GDP growth at the 5% level, but it can be reflected that GDP growth does not Granger cause FDI.Tiwari and Mikhai(2011) verified that exports and FDI show a significant and positive impact on economic growth in a panel of 23 Asian countries during 1986-2008.Chakraborty and Basu(2002) suggest that GDP in India is not Granger caused by FDI ,the causality seems to run more from GDP to FDI.Oluwatosin,Oluoegun,Fetus and Abimbola(2012) showed that FDI has positive linkage over economic growth in five ECOWAS countries during 1970-2005 which was verified through Granger causality tests in VEC model. Yesuf and Tsehaye(2012) investigated the causal link between FDI and economic growth in Ethiopia during 1974-2010 and did not find any causality running from FDI to growth or vice versa but there was an evidence of co-integration between FDI and growth. The flow of FDI is too small to translate into growth. Using the VAR Granger causality/Block Exogeneity Wald Test in Cote d’Ivoire during 1980-2007,N’guessan and Yue(2010) concluded that there is a long run relationship between FDI, trade openness and growth which stated that about 10% increase in trade openness would lead to about 97% growth of output and 10% increase in FDI would result in about 1% in growth of output.
The UNCTAD study which covers 140 countries over the period 1998-2000 with 8 explanatory variables show that FDI can be explained in terms of GDP per capita, exports as a percentage of GDP and telephone lines per 1000 of the populations. In general terms the results tell us that countries that are more successful in attracting FDI are developed countries with a high degree of
openness. Factors failing the EBA robustness test as determinants of FDI inflows included: GDP growth rate, commercial energy use, R&D expenditure, tertiary enrolments and country risk.
Anyanwu (2012) estimated from cross-country regressions for the period 1996-2008 which indicate that: (i) there is a positive relationship between market size and FDI inflows; (ii) openness to trade has a positive impact on FDI inflows; (iii) higher financial development has negative effect on FDI inflows; (iv) the prevalence of the rule of law increases FDI inflows; (v) higher FDI goes where foreign aid also goes; (vi) agglomeration has a strong positive impact on FDI inflows; (vi) natural resource endowment and exploitation (such as oil) attracts huge FDI; (vii) East and Southern African sub-regions appear positively disposed to obtain higher levels of inward FDI.
Applying vector error correction model, Dinda (2009) empirically investigated the determinants of foreign direct investment inflows to Nigeria during 1970-2006. This study suggests that the endowment of natural resources, openness, macroeconomic risk factors like inflation and exchange rates are significant determinants of FDI inflows to Nigeria.
III.Economic growth-foreign direct investment nexus: A Case Study of India
[i] Methodology and data
I have assumed the co-integrating model of foreign direct investment in the following manner,
Y = f( x1,x2 x3,x4 ,x5)
Where Y= foreign direct investment inflows in million US dollars
X1= GDP growth rate per cent per year
X2= Degree of openness ( measured by (export+import)/2/GDP )
X3= Total external debt in million USdollars
X4= interest rate (lending rate as per availability in time series)
X5= exchange rate ( nominal rate with respect to US dollar)
We have collected data from the World Bank,Reserve Bank of India, UNCTAD for the year from 1990 to 2013.For co-integration analysis we use Engle and Granger(1987) , Johansen (1991,1996) and Johansen and Juselius (1990) methodologies.
******* VII.Concluding remarks
Taking GDP growth rate, degree of opennesss, total external debt, interest rate and exchange rate as the important determinants of FDI in India during 1990-2013, the paper verified that the Engle-Granger methodology showed that there is co-integrating relationship where degree of openness and interest rate are significant where as Johansen test proved that there are 5cointegrating vectors in the level series, 5 cointegrating vectors in the first difference series and 5 cointegrating vectors in the log series respectively. The VECM verified that there are serial correlation and ARCH error with non-normal distribution where all roots lie inside the unit circle including 5 unit roots but impulse response functions do not approach to zero and error correction terms and residual systems are explosive.
In concluding remarks we like to mention that a country which has a stable macroeconomic condition with high and sustained growth rates will receive higher FDI inflows than a more volatile economy. Therefore, it is expected that GDP growth rate, industrial production, and interest rates would influence FDI flows positively and the inflation rate would influence positively or negatively. Market size plays an important role in attracting foreign direct investment from abroad. Market size is measured by GDP. Market size tend to influence the inflows, as an increased customer base signifies more opportunities of being successful and also the fact that with the rampant development the purchasing power of the people has also been greatly influenced moving to many levels higher in comparison to what it was before the economic growth.
The paper also concludes that FDI does not cause Granger financial crises but financial crises do cause Granger FDI. In every financial crisis since 1890,FDI changes downward but in Euro crises and US subprime crises, FDI did not decline in most of the East Asian countries. The declining growth and FDI in all financial crises were the general phenomenon. Also in India, financial crises had negative impact on FDI and growth.