Int. J. Mgmt Res. & Bus. Strat. 2013
Priya Dwivedi and Jyoti Badge, 2013
ISSN 2319-345X www.ijmrbs.com
Vol. 2, No. 3, July 2013
© 2013 IJMRBS. All Rights Reserved
IMPACT OF FDI INFLOW ON SERVICE SECTOR IN
INDIA: AN EMPIRICAL ANALYSIS
Priya Dwivedi1* and Jyoti Badge1
*Corresponding Author: Priya Dwivedi,  priyadwivedi4@gmail.com
Foreign Direct Investment (FDI) plays an important role in the economic development of a country.
In this research paper we have dealt with the effect of FDI inflows on the Indian economy over
the period of 2000 to 2012. A statistical model was developed on economic data to investigate
the relationship between FDI inflow and Gross Domestic Product (GDP) especially in service
sector. This analysis has revealed that Foreign Direct Investment has positive and significant
impact on GDP.
Keywords: FDI, GDP, Correlation Analysis, Linear Regression Model
private sector participation, foreign trade and
foreign direct investment. In 1991, Government
of India initiated a no. of economic reforms. As a
result of the various policy initiatives taken, India
has rapidly changing from restrictive regime to a
liberal one Kadam (2012). The various forms of
foreign capital flowing into India has helped to bring
in huge amounts of Foreign Direct Investment
(FDI) into the country, which in its turn has given
a major boost to the Indian economy.
INTRODUCTION
Foreign capital plays a constructive role in a
country’s economic development. Sometimes
domestically available capital is inadequate for
the purpose of various developmental processes.
Foreign capital is seen as a way of filling in gaps
between the domestically available supplies of
savings, government revenue, foreign exchange
and the planned investment necessary to achieve
developmental targets. This is very true in case
of various developing countries like India.
India is the second fastest growing major
economy in the world. Indian economy is diverse
and encompasses agriculture, handicrafts,
manufacturing, textile and a multitude of services
(Wang et al., 2010). India adopted a socialistinspired approach for most of its independent
history with the strict government control over
1
•
According to International Monetary Fund
(IMF), FDI is defined as “an investment
operating in an economy other than that of
the investor.” The investor’s purpose is to
have an effective voice in the management
of the enterprise (IMF, 1977).
•
FDI is the process by which the residents of
one country (the source) acquire the
Institute of Professional Education and Research (IPER), Bhojpur Road, Misrod, Bhopal-462026.
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Int. J. Mgmt Res. & Bus. Strat. 2013
Priya Dwivedi and Jyoti Badge, 2013
openness towards FDI and regulatory framework
and investment projection.
ownership of assets for the purpose of
controlling the production, distribution and
other productive activities of a firm in another
country (the host country)
Figure 1 shows the recent trends in FDI inflows
of some developing countries. According to the
UNCTAD report of 2011 China has the highest
FDI inflows among all the developing countries
like Hong Kong, Russia, Singapore, Brazil and
India; because China has introduced FDI over 20
years ago and has progressively pursued foreign
investment while adjusting its FDI policies. Since
1993, China has attracted the largest amount of
FDI of all developing countries while increasing
its levels of both exports and technological
advancement (Monhanty et al., 2007)
There are two types of FDI
Greenfield Investment: A form of FDI where a
parent company starts a new venture in a foreign
country by constructing new factories and/or
stores.
Mergers and Acquisition: It occurs when a
transfer of existing assets from local firms takes
place.
FDI is not permitted in arms and ammunition,
atomic energy, railway transport, coal and lignite,
mining of iron, manganese, chrome, gypsum,
sulphur, gold, diamond, copper, and zinc.
Cumulative FDI inflows received during April
2000 to August 2012 were 266, 361 US$ mn
(Table 1). From the year 2000 up to 2002,
investments into India grew 52% but declined
during the subsequent two years from 2002 to
2004. India once again experienced a surge in
investments, growing 40% in 2004-05 and 48%
in 2005-06, respectively. The year 2006-07 was
an exceptional year with a 146% growth in FDI
There are many advantages of FDI in India ,like
India has a huge market size and a fast developing
economy, there is the availability of diversified
resources and cheap labor force, increasing
improvement of infrastructure, Public private
partnerships, IT revolution and English literacy,
Figure 1: Trends in FDI Inflows Of Developing Countries
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Int. J. Mgmt Res. & Bus. Strat. 2013
Priya Dwivedi and Jyoti Badge, 2013
Table 1: Financial Year-Wise FDI Inflows Data of India
S. No.
Financial Year
(April To March)
Foreign Direct Investment (FDI) in US$ Million
Total FDI Flows
% Growth Over Previous Year ( US$ Terms)
1
2000-01
4,029
-
2
2001-02
6,130
(+) 52%
3
2002-03
5,035
(-) 18%
4
2003-04
4,322
(-) 14%
5
2004-05
6,051
(+) 40%
6
2005-06
8,961
(+) 48%
7
2006-07
22,826
(+) 146 %
8
2007-08
34,843
(+) 53%
9
2008-09
41,873
(+) 20%
10
2009-10 (P)+
37,745
(-) 10%
11
2010-11 (P)+
34,847
(-) 08%
12
2011-12 (P)
46,553
(+) 34%
13
2012-13(P) (up to August,2012)
13,146
-
Cumulative Total (from April,2000 to August 2012)
266,361
-
Source: Department of Industrial Policy & Promotion, Govt. of India
inflows. During the year of the financial crisis,
Apr’09-Mar’10, foreign direct investments
suffered a slight setback with inflows declining a
little over 10% over the previous year. Last year
(Apr’11-Mar’12) FDI into India improved further
by 34% to US $46,553 mn.
Most of the MNCs are situated in Mumbai that
is why it is the top region where foreigners are
likely to invest their money. Figure 2 shows the
top five regions in India attracting FDI. It shows
that 32% share of the total investment Mumbai
region continues to attract maximum foreign
investments followed by New Delhi, Bangalore
and Ahmadabad etc.
Table 3 explains the sectors attracting highest
FDI Equity Inflow.The service sector (financial and
non- financial), construction development,
telecommunications are the top three sectors that
received maximum investment inflows during the
financial period 2010 to 2013.
LITERATURE REVIEW
FDI is the outcome of mutual interest of
multinational firms and host countries. Global
developments of the present era are such so as
investors of different countries looking forward to
find business opportunities across the national
boundaries of the country. From the theoretical
Table 4 shows the economic growth which is
measured in terms of GDP through FDI during
year 2000-2011.
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Table 2: Share of Top Investing Countries FDI Equity Inflow
Amount Rupees in Crores (US $ in Million)
point of view, FDI is expected to accelerate or
contribute to the economic growth of all countries.
The nexus between FDI and economic growth
has been a subject of great discussion for several
past years. Monhanty et al (2007) examined the
interrelations among the variables FDI, GDP,
exports, and imports of the four countries, china,
India, Malaysia, and Singapore, using the
technique of Panel Data Analysis. Their study
confirmed that FDI promotes economic growth,
provided an estimate that on dollar of FDI adds
about 3.27 dollars to the GDP of each of the four
countries. Narayana et al. (2008), analyzed
theoretically India’s economic growth and the role
of FDI. They showed the comparative analysis of
the Indian and Chinese economy. Elboiashi et al.
(2009), investigated the causal relationships
between FDI, domestic investment (DI) and
economic growth (GDP) in Egytian, Moroccan
and Tu nisian economies. They applied
cointegration time series techniques, Vector Error
Correction (VEC) model over the sample period
of 1970-2006. They found a unidirectional
causality between FDI and GDP in Egypt and
Morocco, and bi-directional causality between FDI
and GDP in Tunisia. Wang et al. (2010), examined
logistics FDI and GDP in two aspects of time
series and growth rate of china. They found
empirically that logistic FDI improved the quality
of foreign investment and promoted the change
of China’s economic growth pattern to ensure the
development of China’s economy. Agrawal et al.
(2011), investigated the effect of FDI on economic
growth of China and India. They studied possible
reasons behind China’s great showed of FDI and
the lessons India should learn from China for
better utilization of FDI. Bose (2012) [2] studied
directed towards detecting the positive and
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Priya Dwivedi and Jyoti Badge, 2013
Table 3: Sectors Attracting Highest FDI Equity Inflow
Amount Rupees in Crores (US $ in Million)
negative sides for the foreign investors while they
Table 4: Foreign Direct Investment,
Net Flows (% of GDP) in India
go for direct investment in India and China. A
Year
Foreign direct investment, net inflows (% of GDP)
descriptive and explorative research study had
2000
0.76
been carried out for investigating the current
2001
1.11
proposition of the concerned case of FDI in those
2002
1.08
two countries. Kadam (2012), analyzed the
2003
0.70
2004
0.80
2005
0.87
2006
2.11
were applied to evaluate the data and to turn up
2007
2.04
the noteworthy inferences. Devajit (2012), tried
2008
3.55
to find out how FDI seen as an important
2009
2.61
economic catalyst of Indian economic growth by
2010
1.57
2011
1.74
direction and impact of FDI on the Indian economy
for the period of 2000-01 to 2010-11 and its
reference period was 2010-11. Statistical
methods like tabulations, percentage ratios, etc.,
stimulating domestic investment, increasing
human capital formation and by facilitating the
technology transfers.
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Priya Dwivedi and Jyoti Badge, 2013
PROBLEM FORMULATION
a linear association between two variables. For
any two variable s X and Y, the correlation
coefficient between them is given by
The major objective of this paper is to analyze
the impact of FDI inflows on the GDP growth in
India especially in service sector. To estimate
whether the relation between FDI inflows and
GDP (in Service Sector) is positive or not, we
have used correlation analyses. And to analyze
its impact, we have used regression model. For
this we have develop a growth model which takes
the form as:
GDP  f ( FDI )
r
 ( X  X )(Y  Y )
 ( X  X )  (Y  Y )
2
2
...(2)
Regression Analysis
Regression analysis is one of the most commonly
used statistical techniques used in almost all
fields. Its main objective is to explore the
relationship between a dependent variable and
one or more independent variables (which are
also called predictor or explanatory variables).
Linear regression explores relationships that can
be readily described by straight lines or their
generalization to many dimensions. In our case
the link between Economic Growth (measured
in terms of GDP growth in service sector) and
foreign direct investment in India described by
using Linear Regression Model.
...(1)
where,
GDP represents percentage growth of GDP
(in service sector) through FDI which is a
dependent variable.
FDI is the foreign direct investment inflow in
India, which is explanatory variable.
Hypothesis Formulation
In this paper, we have to find whether the effect
of FDI inflows has significant effect on our GDP
(in service sector). For that we set up a statistical
hypothesis as:
GDP  a  b( FDI )
...(3)
where,
H0: There is no significant relationship between
FDI inflow and percentage growth of GDP
(in service sector).
H1: There is a significant relationship between
FDI inflow and percentage growth of GDP
(in service sector)
METHODOLOGY OF THE
RESEARCH WORK
FDI
Foreign Direct Investment, net inflow
which is the explanatory variable
GDP
Gross Domestic Product which is the
dependent variable.
b
Regression Coef ficient (to be
estimated) measures how much units
of GDP would be changed with a unit
change in FDI.
a
Intercepts the Y-axis.
Data and Variable
Correlation Analysis
A lot of research has been done in order to
understand the impact of FDI on the economic
growth. Some researchers focused upon the
impact of FDI on the different sectors of the
We used the technique of correlation to test the
statistical significance of the association between
FDI and GDP (in service sector). Correlation
helps to measures the strength and direction of
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Priya Dwivedi and Jyoti Badge, 2013
are the most reliable sources of data and are
used by almost every researcher. The data set
consists of FDI inflow (US$ mn) and Percentage
growth of GDP (in Service Sector) through FDI.
The data set is annual and covers the time period
of 2000-2012.
Figure 2: Top Five Regions
in India Attracting Foreign Direct
Investment (in US $ mn)
Table 5 shows the Financial Year-wise
%growth of GDP in service sector through FDI
during year 2000-2012.
EMPIRICAL ANALYSIS
The estimated result of Correlation Analysis tells
us the association between FDI inflows and GDP
(in Service Sector) is 0.788 which is positive and
significant at 0.01% level of significant. And it is
shown in Table 6.
economy like agriculture sector, industrial sector,
telecommunication, etc., some researchers paid
attention to develop different mathematical and
statistical model to analyze the role of FDI in
economic development. In this study we have
collected the data set from the databank of World
Bank and have been matched up against the data
available on the site of UNCTAD (United Nations
Conference on Trade and Development). Above
two data sources have been chosen because they
The results of the regression model are
estimated as
GDP  52.241  9.074E  5* FDI
...(4)
Other estimated result are as follows:
Table 5: Financial Year Wise % Growth of GDP in Service Sector Through FDI
Financial Year
FDI Inflow (US $ Million)
% Growth of GDP in Service Sector
2000-01
4,029
51.83
2001-02
6,130
53.02
2002-03
5,035
53.18
2003-04
4,322
53.04
2004-05
6,051
53.06
2005-06
8,961
53.87
2006-07
22,826
52.71
2007-08
34,843
53.93
2008-09
41,873
54.72
2009-10
37,745
55.14
2010-11
34,847
56.37
2011-12
46,553
59.0
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Priya Dwivedi and Jyoti Badge, 2013
Table 7 shows the goodness of fit test. Here
Coefficient of determination (R square) is 0.621
and adjusted R-square is 0.582. It means that
the 58.3% of variations in the GDP (in service
sector) are explained with the help of FDI. And
standard error of the estimate is 1.26118.
Table 9 shows the coeff icients of the
regression equation, their respective level of
significance even at lower than 1% level of
significance. Therefore the estimated results of
the model demonstrate that there is a positive
impact of the FDI on the GDP (in service sector).
Table 8 shows the overall significance of the
model. For this purpose the Analysis of Variance/
F-statistics is used. The value of the F-statistics
is 16.391 significant at 1% level of significance.
Table 10 shows the expected and actual value
of % Growth of GDP in Service Sector using
regression equation.
Table 6: Correlation Analysis
Correlations
FDI Inflow
Pearson Correlation
FDI Inflow
GDP (Service Sector)
1
.788**
Sig. (2-tailed)
GDP(Service Sector)
.002
N
12
12
Pearson Correlation
.788**
1
Sig. (2-tailed)
.002
N
12
12
Note: ** Correlation is significant at the 0.01 level (two-tailed)
Table 7: Goodness of Fit Test
Model Summary
Model
1
R
R Square
Adjusted R Square
Std. Error of the Estimate
.788a
.621
.583
1.26118
Table 8: Overall Significance of the Model (ANOVA/F-Statistics)
ANOVA
Model
1
Sum of Squares
df
Mean Square
F
Sig.
Regression
26.071
1
26.071
16.391
.002
Residual
15.906
10
1.591
Total
41.976
11
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Table 9: Regression Coefficient
Coefficients
Model
1
Unstandardized Coefficients
B
Std. Error
(Constant)
52.241
.597
FDI Inflow
9.074E-5
.000
Standardized Coefficients
t
Sig.
87.528
.000
4.049
.002
Beta
.788
Table 10: Expected Value of % Growth of GDP in Service Sector by Linear Regression Model
FDI Inflow
(US $ Million)
Actual value of %
Growth of GDP in
Service Sector
Expected Value of %
Growth of GDP in
Service Sector
% of Variation
between Actual &
Expected Value
2000-01
4,029
51.83
52.61
1.51
2001-02
6,130
53.02
52.80
0.41
2002-03
5,035
53.18
52.70
0.91
2003-04
4,322
53.04
52.63
0.77
2004-05
6,051
53.06
52.79
0.51
2005-06
8,961
53.87
53.05
1.52
2006-07
22,826
52.71
54.31
3.03
2007-08
34,843
53.93
55.40
2.72
2008-09
41,873
54.72
56.04
2.41
2009-10
37,745
55.14
55.67
0.96
2010-11
34,847
56.37
55.40
1.72
2011-12
46,553
59.0
56.47
4.29
Financial Year
factors (trade openness, interest rates, exchange
rates, inflation, etc.) A computational model will
be designed to enhance the accuracy of our
growth model using micro-economic factors.
CONCLUSION
FDI as a strategic component of investment is
needed by India for its sustained economic growth
and development through creation of jobs,
expansion of existing manufacturing industries,
short and long term project in the field of
healthcare, education, research and development
(R&D), etc. The current study showed a positive
and significant impact of foreign capital inflows
on Indian economy. In future work, effect of FDI
will be studied by taking other micro-economic
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