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
Price-Rs1440/-,pp-xiii+382
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
Dr.Debesh Bhowmik
(Retired Principal
and associated in International Institute for Development Studies, Kolkata)
Email-debeshbhowmik@rediffmail.com
Key words- Foreign
Direct Investment, economic growth, financial crises,currency crisis,banking
crisis,sovereign crisis
JEL-C23,C33, F21,F01,O55
I.Introduction
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.
