Foreign Direct Investments (FDIs) and Opportunities for Developing Economies in the World Market

by

Venkataramanaiah Malepati (University of Gondar, Ethiopia) and C. Mangala Gowri (University of Gondar, Ethiopia)

Release Date: December, 2017|Copyright: © 2018 |Pages: 315

ISBN13: 9781522530268|ISBN10: 1522530266|EISBN13: 9781522530275|DOI: 10.4018/978-1-5225-3026-8

Chapter 1:Foreign Direct Investment, Technological Innovation, and Export Performance: Empirical Evidence From Developing Asia (pages 1-24)—by-Arzu Tay Bayramoglu, Tezcan Abasız

Chapter 2:Determinants of FDI Inflows in Developing Countries: A Dynamic Panel Approach (pages 25-45)—by--Dinesh Kumar Choudhury, Prabhakara Rao

Chapter 3:The Role of Foreign Direct Investment in Less-Developed Countries (pages 46-65)-by-

Chengchun Li, Sailesh K. Tanna

Chapter 4:Socio-Economic Impact of Foreign Direct Investment in Developing Countries (pages 66-81)-by-Christopher Boachie, Eunice Adu-Darko

Chapter 5:FDI as a Factor of Improving the Competitiveness of Developing Countries: FDI and Competitiveness (pages 82-104)-by-Ivana S. Domazet, Darko M. Marjanović

Chapter 6:The Relative Importance of Trade vs. FDI-Led Economic Growth in Thailand (pages 105-122)-by-Sailesh Tanna, Kitja Topaiboul, Chengchun Li

Chapter 7:FDI Inflows and Current Account Evidence From BIMSTEC (pages 123-141)-by-

Nida Rahman, Shehroz Alam Rizvi

Chapter 8:The Comparative Study of the FDI in India and China in Retail Sector (pages 142-168)

-by-Rita Naraindas Khatri

Chapter 9:M&A vs. Greenfield: FDI for Economic Growth in Emerging Economies (pages 169-185)

-by-Sana Moid

Chapter 10:Patterns of Technology Acquisition: Upstream Linkages Between MNEs and Local Suppliers (pages 186-212)-by-António Carrizo Moreira

Chapter 11:The Role of Governance on Foreign Direct Investment Inflows: A New Theoretical Perspective and Cross-Country Analysis (pages 213-247)-by-Adem Gök

Chapter 12:Econometric Analysis of India's Foreign Direct Investment Inflows (pages 248-275)

-by-Debesh Bhowmik

Chapter 12

Econometric Analysis of India’s Foreign Direct Investment Inflows

Debesh Bhowmik(International Institute for Development Studies, Kolkata, India)

ABSTRACT

In this chapter, the author explains the trend lines, random walk, stationary,

structural breaks, and volatility of FDI inflows in India during 1971-2015. Both

log linear and exponential trends are significant. FDI inflows are stationary and

showed four structural breaks in 1985, 1994, 2000, and 2006. The author found the

relation among FDI inflows, growth rate, interest rate, inflation rate, exchange rate,

fiscal deficit, external debt, and trade openness with the help of Granger causality,

Johansen cointegration test, and vector error correction models. Trace statistic

has four cointegrating equations, and Max Eigen statistic has three cointegrating

equations. The speed of the vector error correction process is more or less slow

except for change in interest rate and change in inflation rate, which are significant

where VECM is stable and diverging. Limitations and future scope of research is

added. Policy recommendations are also included.

INTRODUCTION

Foreign direct investment (FDI) is an investment in a business by an investor from

another country for which the foreign investor has control over the company purchased.

The Organization of Economic Cooperation and Development (OECD) defines

control as owning 10% or more of the business. Businesses that make foreign direct

investments are often called multinational corporations (MNCs) or multinational

enterprises (MNEs). FDI provides a win – win situation to the host and the home countries. FDI as a strategic component of investment is needed by India for its

sustained economic growth and development. FDI is necessary for creation of jobs,

expansion of existing manufacturing industries and development of the new one.

Indeed, it is also needed in the healthcare, education, R&D, infrastructure, retailing

and in long term financial projects. Need of FDI depends on saving and investment rate

in any country. Foreign Direct investment acts as a bridge to fulfill the gap between

investment and saving. In the process of economic development foreign capital helps

to cover the domestic saving constraint and provide access to the superior technology

that promotes efficiency and productivity of the existing production capacity and

generate new production opportunity. Foreign investments mean both foreign portfolio

investments and foreign direct investments (FDI). FDI brings better technology and

management, marketing networks and offers competition, the latter helping Indian

companies improve, quite apart from being good for consumers. The effectiveness

of FDI in bringing about the desired growth may be constrained by the level of

infrastructural developments and other macroeconomic variables . Infrastructural

development, openness and domestic market size are major determinants of FDI.

Even, exchange rate and interest rate may influence FDI inflows. Besides, balance of

payments adjustment is a good correlation with FDI flows. Political instability and

financial crises influence FDI flows negatively. Alongside opening up of the FDI

regime, steps were taken to allow foreign portfolio investments into the Indian stock

market through the mechanism of foreign institutional investors. The objective was

not only to facilitate non‐debt creating foreign capital inflows but also to develop the

stock market in India, lower the cost of capital for Indian enterprises and indirectly

improve corporate governance structures. FDI have helped India to attain a financial

stability and economic growth with the help of investments in different sectors. FDI

has boosted the economic life of India.

By allowing MNC in Indian economy, the government of India with the help of

World Bank and IMF introduced the macro-economic stabilization and structural

adjustment program. As a result of these reforms India open its door to FDI inflows

and adopted a more liberal foreign policy in order to restore the confidence of foreign

investors. Further, under the new foreign investment policy Government of India

constituted FIPB (Foreign Investment Promotion Board) whose main function was

to invite and facilitate foreign investment.

OBJECTIVE OF THE STUDY

In this paper, the author endeavors to explain the patterns of behavior of India’s foreign

direct investment inflows during 1971-2015. Besides, the author tries to relate FDI

inflows with macro variables like growth rate, interest rate, inflation rate, exchange

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