IMPACT OF FOREIGN DIRECT INVESTMENT ON MACRO
ECONOMIC PARAMETERS OF INDIA: AN EMPIRICAL
ANALYSIS
Dr. Mandeep Kaur
Associate Professor
Department of Commerce,
Guru Nanak Dev University,
Amritsar 143005
email: mandeep.gndu@gmail.com
mkaur02@yhaoo.co.in
Dr. Renu Sharma
Assistant Professor
P.G. Department of Commerce,
K.L.S.D. College, Ludhiana
email:renu_raj2008@hotmail.com
IMPACT OF FOREIGN DIRECT INVESTMENT ON
MACRO ECONOMIC PARAMETERS OF INDIA: AN
EMPIRICAL ANALYSIS
Abstract
Foreign direct investment (FDI) is considered to be one of the important factors,
which leads to the globalization of an economy. The globalization over the last two
decades has been hailed as a major development, which result in economic prosperity
in developing countries. The present study analyses the impact of FDI on some
macroeconomic indicators in India. Explanatory variables used in the study are
Gross Domestic Product (GDP), Foreign Exchange Reserves (RES), Gross Capital
formation (GCF), Exports (EXP), Employment (EMP). The technique of
Cointegration has been applied to investigate the impact of FDI on the economy of
India. Augmented Dickey Fuller (ADF) test and Philip Parron test have also been
applied to check the stationarity of data series. Empirical analysis concludes positive
and significant impact of FDI on GDP, GCF, EXP, EMP and RES. The value of X
coefficient shows a trend from 0.065to 0.634 in India. The minimum variation due to
FDI is found out in case of EMP (0.065%) and maximum in Reserves (0.634%).
Keywords: FDI, Impact, India, Macroeconomic Parameters
IMPACT OF FOREIGN DIRECT INVESTMENT ON MACRO
ECONOMIC PARAMETERS OF INDIA: AN EMPIRICAL
ANALYSIS
FDI is a particularly significant driving force behind the interdependence of national
economies. Even though most of the FDI flows have always concentrated in the
developed countries, its importance is undeniable for developing countries as well.
Economic development is a wider concept. It centres on economic and social
progress, but also entails many different aspects that are not easily quantified, such as
political freedom, social justice, and environmental soundness. All these matters
combine to contribute to an overall high standard of living (Sun, 2002).The amount of
FDI as compared to China and other developed countries is quite less but it has
helped in economic transformation of India.
FDI involves the transfer of managerial resources to the host country. The
endogenous growth theories explained the effect of FDI on economic growth through
knowledge externalities and the existence of human capital in host developing
countries. According to this theory, FDI contributes significantly to human capital
such as managerial skills and research and development (R&D). MNCs can have a
positive impact on human capital in host countries through the training courses they
provide to their subsidiaries’ local workers. Research and development activities
financed by MNCs also contribute to human capital in host countries and thus enable
these economies to grow in the long term (Lan, 2006).
This study has been categorised into 4 sections. The first section reviews the
existing studies on the impact of FDI. Section II explains the theoretical framework of
variables under the study and their expected theoretical relationship with FDI. Section
III describes data base and methodology. Results and discussion have been presented
in Section IV.
Section I
Review of literature
In this section, the various studies have been explored regarding contributions
made by the foreign direct investment inflows towards development of any economy
due to its favourable and unfavourable effects on various macro economic variables
indicating growth, performance and efficiency of the country. The voluminous
literature suggests that the impact of foreign direct investment on economic growth is
not straightforward and varies across countries. Using various growth models, these
aforementioned propositions have been empirically examined by different
researchers. The results of this review are presented in Table 1.
From review of the existing literature regarding finding the impact of FDI on
various macroeconomic indicators of growth in the economy it has been observed that
several studies like Shan et al. (1998); Agosin and Mayer (2000); Alarm (2001);
Chowdhury and Mavrotas (2003); Hansen et al. (2003); Panayides et al. (2003);
Sharma (2003); Wen (2004); Lumbila (2005); Athukorola and Sen (1995); Lan
(2006); Paolino, M. (2009); Ma (2009) investigated the positive impact of FDI on
domestic investment, agriculture, industry, imports, openness, low geographical
distance, investment climate, infrastructure, stable macro environment, government
expenditure and growth of labour.
Most of the studies conducted in India also found positive impact of FDI on
GDP and a few of them evaluated no relationship between FDI and GDP
(Mathiyazagan, 2005) while Lo, (2007) investigated negative impact of FDI on GDP.
There arises an uncertainty regarding this relationship due to the lack of general
consensus among the researchers about the nature of this impact. Therefore, GDP as a
parameter of growth has been taken in the present study to verify its exact impact.
Mathiyazhagan, (2005) and Sharma, (2003) have not found any significant impact of
FDI on exports in India while Alarm (2001); Wen, (2004); Lan (2006) observed
positive impact of FDI on exports. It has also been observed from the review of
literature that research work regarding finding the impact of FDI on variables like
foreign exchange reserves and employment is seriously lacking as these are very
important economic parameters reflecting the state of any economy.
After thorough investigation of the findings of various researchers it has been
concluded that impact of FDI on some very important macroeconomic indicators like
GDP, exports, foreign exchange reserves and employment is either debatable or need
further extensive efforts for exploration of the effect of FDI on these variables for
India.
Table: 1 A Descriptive Review of Literature related to the impact of FDI
Studies 
Shan
et al.
(1998)
Agosin
and
Mayer
(2000)
Alarm
(2001)
Chowdhury
and
Mavrotas
(2003)
Hansen
and Rand
(2003)
Hansen
et al.
(2003)
Panayides
et al.
(2003)
Sharma
(2003)
Mathiyazagan
(2005)
Lumbila
(2005)
Lan
(2006)
Jallab et
al.
(2008)
Paolino,
M.
(2009)
Tiwari
and
Mutasku
(2011)
Das
and
Das
(2012)
Mehra
(2013)
Gaikwad
(2013)
Sample Size

China
Africa,
Asia
and
Latin
America
2
developing
countries
Chile,
Malaysia
and
Thailand
31
developing
countries
5 Asian
countries
China
India
India
47
African
Countries
61
Provinces
MENA
Countries
China
23 Asian
Countries
India
India
India
Period
Study 
(19801995)
(19701996)
(19851995)
(1969-2000)
(19702000)
(19902001)
(19902001)
(19902001)
(1990-2001)
(19802000)
(19962003)
(19702005)
(19772007)
(19802008)
(19912000)
of
(19902008)
Variables
taken 
GDP
(+ve)*
-
(+ve)*
(+ve)*
(+ve)*
-
(+ve)*
-
NR
-
Domestic
Investment
-
(+ve)*
(+ve)*
-
-
-
-
-
-
-
Agriculture
-
-
(+ve)*
-
-
-
-
-
-
-
Industry
-
-
(+ve)*
-
-
-
-
-
-
Imports
-
-
(+ve)*
-
-
-
-
-
-
-
Exports
-
-
(+ve)*
-
-
-
-
(+ve)
NR
-
Employment
-
-
-
-
-
-
-
-
-
Openness
-
-
-
-
-
(+ve)*
-
-
-
-
Low
Geographical
Distance
-
-
-
-
-
-
(+ve)*
-
-
--
(+ve)*
(+ve)*
(+ve)*
(+ve)*
(-ve)*
(+ve)*
(+ve)*
NR
(+ve)*
Gross Fixed
Capital
Formation
-
Investment
Climate
-
-
(+ve)*
Infrastructures
-
-
(+ve)*
Stable Macro
Environment
-
-
(+ve)*
Government
Expenditure
-
-
-
Growth
Labour
-
(+ve)*
(+ve)*
of
(+ve)*
Exchange rate
(+ve)*
*indicates the significance of variable; NR indicates no relationship
NR
Section II
Expected Impact of FDI on Macro Economic Variables under Study
The endogenous growth theories strongly support the role of FDI in promoting
economic growth in host countries. In these theories, FDI is viewed as a way to
transfer knowledge, promote learning by doing, bring in technology spillover, and
human capital growth. Consequently, FDI stimulates economic growth in host
countries (Lan, 2006). There are still inconclusive arguments for and against the role
of FDI inflows in enhancing economic growth in a country. Whether FDI inflows are
beneficial or not to economic growth especially in host developing countries are still
debateable among economists. It is therefore very essential to analyse expected
theoretical relationship between FDI and these macro economic variables before
doing empirical investigation regarding their relationship. This has been discussed
below:
Gross Domestic Product:
The most widespread belief among researchers and policy makers is that FDI
boosts growth through different channels. It increases the capital stock, stimulates
technological change through technological diffusion and generates technological
spillovers for local firms. Foreign investment is expected to increase and improve the
existing stock of knowledge in the recipient economy through labour training, skill
acquisition and diffusion. It contributes by introducing new management practices
and a more efficient organization of the production process. As a result, FDI improves
the productivity of host countries and stimulates economic growth in terms of increase
in GDP (Jallab, 2008). Investigating the impact of foreign capital on economic growth
has important policy implications. Positive impact of FDI on economic growth
weakens the arguments for restricting foreign investment in the host country.
However the negative impact of FDI on growth would suggest a reconsideration of
development policies adopted by countries for attracting FDI to enhance the level of
their growth (Carkovic and Levine, 2000).
Foreign Exchange Reserves:
Foreign exchange reserves are the external assets that are readily available to
and controlled by monetary authorities for direct financing of payments. It is the total
of a country's gold holdings and convertible foreign currencies held in its banks, plus
special drawing rights (SDR) and exchange reserve balances with the International
Monetary Fund (IMF). Foreign investment causes certain advantages like technology
transfer, marketing expertise, introduction of modern managerial techniques and thus
creating immense possibilities of increased foreign exchange reserves in the country
concerned. Foreign investors are generally considered to be better placed to tap
international market than their local counterparts because of their massive assess to
the information and marketing networks of their parent enterprises which facilitates
their efforts to increase foreign exchange reserves in the host country (Chopra, 2003).
Gross Capital Formation:
It is the creation of productive assets that expand an economy's capacity to
produce goods and services. Private savings facilitate capital formation by allowing
resources to be diverted to corporate investment rather than individual consumption
(Scott, 2003). It is very crucial macro economic parameter which determines the
growth of an economy. Since FDI establishes backward and forward linkages with
local industries, it can also encourage domestic investment by creating an enabling
investment environment through transferring technologies and better management
techniques. Transnational corporations typically have access to a wide variety of
financing options. The risk-adjusted cost of capital is usually lower for them than the
domestic firms in developing countries. Foreign firms can undertake projects for
which domestic investors do not have the capacities to carry out or which are
considered too risky for host country firms. In such cases, FDI also serves to stimulate
domestic investment by further boosting the total host country investment. FDI not
only adds to external financial resources for host country development, it is also more
stable than other forms of financing (Sun, 2002).
Employment:
FDI serves as a catalyst for rapid economic growth by enabling developing
countries to catch up with advanced economies. FDI plays a major role in the larger
development agenda of the host countries. There is one main social aspect of
development such as employment. Increasing gainful and secure employment has
always ranked high as a policy objective for developing countries. It is a principal
means to achieve an equitable distribution of income and higher standard of welfare
for the majority of the population. There are three basic mechanisms for FDI to
generate employment in the recipient countries. First, foreign subsidiaries employ
people in their domestic operations. Second, through backward and forward linkages,
employment is created in enterprises that are suppliers, subcontractors, or service
providers to them. Thirdly with the expansion of FDI in related industries,
employment is also generated in different sectors of the economy. FDI often plays a
unique role in employment creation and upgrading of the host countries because of
the special features of foreign investments i.e its tendency to be larger in size, with
greater technological sophistication, and ability to face more competitive pressures in
their product markets as compared to domestic enterprises (Sun, 2002).
Exports:
FDI is expected to have strong positive relation with the exports volume. This
is quite in tune with common knowledge that export performance is influenced by
technology intensity and hence industry associated with high technology efforts has a
tendency to export high proportion of their product. Country with an importer of
foreign technology can be postulated to have better export performance. This is the
reason to assume an improved export performance of a country where FDI stake is
high. As exporting involves high degree of risk and uncertainty, so foreign firm with
higher profitability due to greater assess to financial resources do better on export
front. Export-oriented FDI is of higher quality than the domestic market-seeking FDI.
This is because export-oriented companies tend to form micro-level linkages with
domestic firms in the form of sourcing and partnerships. Their objective is to exploit
the low cost infrastructure and cheap labour skill available locally for export
purposes. In addition to knowledge spillovers to local suppliers, export-oriented
foreign firms also cause information spillovers to purely domestic firms to enter into
export market (Chopra, 2003).
Table 2: FDI and Some Macro Economic Variables in India for the
period 1976 to 2013
FDI
GDP
Reserves
Exports
GCF
EMP
Years
(in US $ Million)
(in US $ Million)
(in US $ Million)
(in US $ Million)
(in US $ Million)
(in Thousands)
1976
51
101196
3070
6,854
23,347
192881
1977
36
117421
5765
7,602
25,611
196316
1978
18
135833
6793
8,688
33,351
199826
1979
49
150317
7843
10,268
37,866
203393
1980
79
185402
7354
11488
42,586
262011.8
1981
92
197762
5026
11850
51855
268424.6
1982
72
201927
4634
12235
50179
274736
1983
6
220318
5267
13016
51300
281141.9
1984
19
218222
6141
13952
60683
287766.1
1985
106
227247
6791
12093
52032
294447.3
1986
118
248982
6825
13124
63699
301344.3
1987
121
275529
6979
15654
68350
308525.7
1988
91
304809
5409
18628
81958
315672
1989
252
301764
4325
21339
80348
322843.4
1990
162
327930
2050
23225
91353
329759.8
1991
74
290687
4190
24746
72864
336606.5
1992
277
291925
6326
25982
77443
343260.1
1993
550
284972
10722
28251
66939
349829.4
1994
973
328472
20303
32386
84357
356674.7
1995
2144
370522
18631
40316
108645
363303.4
1996
2821
390520
20848
40881
93960
370192.3
1997
3577
420040
25304
45494
105795
377025.5
1998
2462
428750
27948
47330
100833
384004.4
1999
2155
454952
33159
52885
118966
391142
2000
2339
468970
38341
61886
113835
398362.8
2001
3904
483466
46497
61619
117506
406655.2
2002
8574
503954
68237
73144
127342
415047.3
2003
4585
592535
99806
87543
157705
423616.5
2004
5474
688803
126972
130540
196230
430444.9
2005
6598
808884
132567
161471
250521
438765.7
2006
20336
903226
170843
202354
307580
446882.7
2007
25127
1141346
267582
241711
401231
455348.3
2008
41554
1252403
306429
271645
430036
467231
2009
35657
1338248
266166
260847
429810
471650
2010
27431
1704795
276243
348035
499309
472580
2011
36190
1923046
272249
446375
506613
481098
2012
24196
1875213
271551
443629
532670
489687
2013
28199
1924452
274536
464188
543678
507486
Source: World Investments Reports for the years 1978 to 2014.
Table 2 shows the data for FDI and some macro-economic variables for a
period of 38 years i.e. 1976 through 2013. This table shows that all the variables have
shown increasing trends with the passage of time. FDI has shown increasing but
fluctuating trend from the year 1976 to 2013. India’s GDP was found to be 101196
US $ million in the year 1976 and has increased 19 times in the year 2013 (1924452
US $ million). Foreign exchange reserves in India (274536 US $ million) were
noticed to be higher than that was in the year 1976 (3070 US $ million). The variable
GCF has shown consistent growth from 23347 US $ million in the year 1976 to
543678 US $ million in the year 2013. The variable Exports has also grown 80 times
with the passage of time in the study. The variable Employment has shown 5 times
increase during the period of study.
Section III
Data Base and Research Methodology
It has been observed from review of the literature that some studies have
evaluated positive (Guha and Ray, 2000; Rangarajan, 2000; Hansen et al., 2003; Yao,
2006;Tiwari,2011 etc.) while some others have found negative or no impact of FDI on
growth (Lo, 2007; Mathiyazhagan, 2005;Falki,2009;Das and Das,2012). There arises a
doubt on this relationship on account of lack of general consensus among the
researcher about the nature of this impact. Therefore, GDP as a parameter of growth
has been taken in the present study to verify the exact nature of impact. Very few
studies have investigated the impact of FDI on Foreign Exchange Reserves (RES).
Moreover, FDI is supposed to resolve foreign exchange reserves constraints by its
contribution to increased exports apart from bringing in net resource inflows on the
capital account of the country. So, there is need to estimate the exact impact of FDI on
RES.
Gross Capital Formation (GCF) has been selected as a parameter for studying
the impact of FDI because it has always remained a debatable issue that whether FDI
has favourable or adverse impact on domestic capital . Herrero and Simon, (2003)
found out week impact of FDI on exports in developing country while
Mathiyazhagan, (2005) and Sharma, (2003) found insignificant impact on exports of
India. So, this implies a thorough investigation on account of disagreement regarding
the impact of FDI on this major reflector of growth.
Generation of Employment (EMP) has become the foremost agenda of India
and a very important indicator of growth in the economy which advocates the logic
for including this variable in the present study. Moreover genuine and extensive
research work regarding this parameter in India is seriously lacking.Mehra,2013
found no relationship between Employment and FDI. All the facts and logics given
above lay down the strong foundation for selecting Gross Domestic Product (GDP),
Gross Capital Formation (GCF), Exports (EXP), Employment (EMP) and Foreign
Exchange Reserves (RES) as macroeconomic parameters to study the impact of FDI
inflows in India. In this chapter an attempt has been made to assess the impact of FDI
on the selected macro economic variables (mentioned above) in India.
Variables, Data Source and Period of the Study
The data has been taken from year 1976 to 2013 for India. The data has been
drawn from the World Development Indicators and World Development Reports
published by the World Bank. The variables used in the study are Foreign Direct
Investment (FDI), Gross Domestic Product (GDP), Gross Capital Formation (GCF),
Export (EXP), Employment (EMP), and Foreign Exchange Reserves (RES). In order
to neutralise the impact of change in prices, all the variables except Employment has
been deflated at 1993-94 prices by using Purchasing Power Parity Index (PPI).
Description of Variables:
Variables
Description
LNEMP
Natural Log of Employment
LNEXP
Natural Log of Exports
LNFDI
Natural Log of Foreign Direct Investment
LNGCF
Natural Log of Gross Capital Formation Inflation
LNGDP
Natural Log of Gross domestic product
LNRES
Natural Log of Reserves
Statistical Diagnostic
Initially, the study used the regression analysis for finding the dependence of
GDP on FDI then the dependence of other variables like RES, GCF, EXP and EMP
on FDI has been determined individually. Stationarity of all the variables have been
tested by applying ADF test then simple regression technique has been used. The
results of the analysis have been depicted in Table no. 3. Value of coefficient
indicates the change in dependent variable due to unit change in independent variable.
Value of adjusted R2 shows the percentage explained variation in dependent variable
caused by the independent variable. X coefficients as shown in Table no. 3 show
positive impact of FDI on all the variables of the study. It means that any increase in
FDI will lead to increase in the dependent variables.
Table 3: Regression Results (FDI as Independent Variable) India
Variable
Coefficients
Standard
t-Statistics
Prob.
Adjusted
F-statistic
R2
Error
Durbin
Watson
EMP
0.084
0.008
10.43
0.000
0.76
108.95*
0.39
EXP
0.475
0.026
17.64
0.000
0.91
311.40*
0.94
GCF
0.342
0.024
13.77
0.000
0.84
189.66*
GDP
0.315
0.021
14.91
0.000
0.88
222.55*
0.74
RES
0.579
0.040
14.23
0.000
0.86
202.66*
0.80
0.71
** denotes significance at the level 1%.
All the variables have significant F value showing the significance of the
model. The value of adjusted R2 ranges between 0.76% to 0.91%. The analysis further
reveals that the value of Durbin-Watson statistics is very low signifying the existence
of autocorrelation. To overcome this problem, cointegration test has been applied to
examine the impact of FDI on macro economic parameters selected in the study
which is free from all these types of errors.
Econometric Methodology
The technique of cointegration has been used to assess the impact of FDI on
various macroeconomic parameters taken for this objective. The first step of the
estimation process is to examine the time series properties of the data series i.e.
presence of drift and trend in the data and test for stationarity and the order of
integration. In fact most economic variables are non-stationary (integrated) in their
level form. These non stationary time series may result to spurious regressions.
Although a simple least squares regression of integrated variables may be spurious,
one or more linear combinations of the series may exist that result in a stationary
residual. There is need to check for the stationary of each series before applying
aforesaid technique. All the six variables namely LNGDP, LNEMP, LNEXP,
LNGCF, LNFDI, and LNRES have been tested for stationarity by applying the
Augmented Dickey-Fuller test (ADF) before estimating any relationships between
FDI and various macroeconomic parameters.
Section IV
Results and Discussion
The analysis of these variables in this paper indicates the dependence of
growth of gross domestic product and other macro economic constituents of the
economy on FDI based on empirical investigation of five variables. The ADF test
results for the six variables involved in the analysis have been presented in Table 4. It
has been observed that the null hypothesis of presence of Unit Root has been rejected
for all the first difference variables specified. This shows that all variables are
integrated of order one and hence, observed stationary at first difference. This
suggests that Cointegration analysis can be applied to examine existence of long run
relationship among the variables under study.
Table 4: Augmented Dickey Fuller Test Results
Unit Root Tests at Logarithmic levels
Sr. No.
Variables
Without Drift and
Time Trend
With Drift
With Drift and
Time Trend
1
LNEMP
3.0501
-2.4281
-2.3502
2
LNEXP
7.4094
2.1300
-0.1733
3
LNFDI
1.5934
-0.0166
-3.3197
4
LNGCF
4.5696
1. 0722
-0.1724
5
LNGDP
6.3129
0.7298
-0.8886
6
LNRES
3.2625
0.8558
-1.0069
Unit Root Tests at First Differences
Sr. No.
Variables
Without Drift and
Time Trend
With Drift
With Drift and
Time Trend
1
LNEMP
-4.1257**
-5.5312**
-5.8421**
2
LNEXP
-0.0597
-4.9221**
-5.3423**
3
LNFDI
-5.1682**
-5.6096**
-5.6041**
4
LNGCF
0.0415
-6.8679**
-6.9650**
5
LNGDP
-0.1178
-5.0501**
-5.1616**
6
LNRES
-4.0188**
-4.6184**
-5.0865**
** denotes significance at the level 1%. Critical values obtained from Mackinnon (1991) are -2.85, 3.41, and -1.94 at 5% level and -3.43, -3.96, and -2.56 at 1% for first second and third model respectively.
Further implication is that there is a possibility to have a co-integrating vector
whose coefficient can directly be interpreted as long-term impact coefficients.
Therefore, as next step, Johansen Trace test has to be used to check whether we have
a cointegration test where each form differs in the assumed deterministic
component(s) in the series: After selecting the order of integrating, next step is to test
the cointegration rank. Here, a Vector Autoregressive Regression (VAR) system is to
be formed. This step involves testing for the appropriate lag length of the system. In
this model lag length has been taken as one for VAR and Zero for cointegration
window due to small sample size and less number of observations. Third model for
cointegrating window has been selected which is the most realistic one i.e intercept in
Cointegrating equation and VAR.
The impact of FDI on these macroeconomic variables has been determined by
taking five cointegrating relationships i.e GDP with FDI, GCF with FDI, RES with
FDI, EXP with FDI and EMP with FDI. This cointegrating relationship represents the
foundation of a complete Dynamic Error Correction Model. Vector error correction
model (VECM) of the endogenous variables has been specified which provides a
generalization of the partial adjustment model and permits the estimation of short-run
and long-run elasticities. This long-run association shows the elasticities of GDP,
GCF, RES, EXP and EXP with respect to FDI. Here X coefficient (elasticities) shows
the percentage change in macro economic parameters due to one % change in FDI.
Results are presented in Table 5.
Table 5: Estimated Cointegrating Relationship
Equations
Variables
Constant
Impact of FDI
1
LNGDP
11.424
0.284**
(8.45)
2
LNGCF
8.975
0.301**
(7.82)
3
LNEXP
6.943
0.446**
(10.43)
4
LNEMP
11.654
0.065**
(4.56)
5
LNRES
6.124
0.634**
(9.32)
** denotes significance at the level 1%. Figures in Parentheses are t values.
The results of the analysis given in this Table can also be depicted in the form
of the following regression equations to have more lucid explanation. Equation no. 1
to 5 indicates the impact of independent variable FDI on various macro economic
parameters taken in the study for India.
GDP = 11.424+ 0.284 FDI +u1i
(8.45)
GCF = 8.975 + 0.301 FDI + u2i
(7.82)
…………………………(1)
…………………………(2)
EXP = 6.943+ 0.446 FDI + u3i
(10.43)
…………………………(3)
EMP = 11.654+ 0.065 FDI + u4i
(4.56)
…………………………(4)
RES = 6.124+ 0.634 FDI + u5i
(9.32)
…………………………(5)
In India, X coefficient is 0.284 in case of GDP which shows positive and
significant impact of FDI on GDP. It means one % increase in FDI results in 0.284
percentage increase in GDP. This is due the reason that FDI enhances economic
growth by promoting technological developments and increasing level of production,
income and export potential of a country.
X coefficients of 0.301 has been calculated in India as far as the gross capital
formation (GCF) is concerned showing 1% increase in FDI would cause the gross
capital formation to rise by 0.301%. This also indicates the positive impact of FDI on
GCF. Since FDI establishes backward and forward linkages with local industries, it
can also encourage domestic investment by creating investment environment and by
transferring technologies. However, the relationship between FDI and domestic
investment depends on government policies, the quality of FDI and domestic
regulatory environment (Alfaro, 2003).
Exports is also found to be statistically significant variable affected by FDI as
the coefficient of this variable are determined as 0.446 and which shows the 0.446 %
variation in this variable is due to 1% change in FDI in India. FDI is also expected to
have strong positive relation with the exports volume. This is because of the reason
that the country with an importer of foreign technology can be postulated to have
better export performance (Chopra, 2003).
FDI is found to be significant factor that causes the 0.065 % variations in
employment as the value of X coefficients depict the positive impact of FDI on this
variable. FDI helps to start new industries and also to expand existing industrial
capacity, which in turn tends to increase output and thus employment in a country.
The coefficient of Reserves is estimated to be 0.634 indicating that a 1%
increase in FDI would cause the Reserves to rise by 0.634 %. It has been found out that
Reserves are positively related to FDI.
Table 6 Error Correction Term of VECM (India)
Variables
LNGDP
Error Correction Term
1.053**
(3.18)
LNRES
0.362**
(3.19)
LNEMP
0.289*
(2.16)
* denotes significance at the level 5%. ** denotes significance at the level 1%.
Figures in Parentheses are t values.
The results in Table 6 provide short run dynamics pertaining to the adjustment
of disequilibrium in the short period for India. In this Table error correction term
represent the speed of adjustment and serves as a measure of disequilibrium
representing the stochastic shocks in the dependent variable. This shows the
proportion by which the long run disequilibrium in the dependent variable is
corrected in each short period. It has been observed that any disequilibrium in the
growth of GDP and RES would be corrected in the 0.94 years (1/1.053 =0.94), and
2.76 years (1/0.362= 2.76) respectively in India while EMP will converge toward
equilibrium in 3.46 years (1/0.289= 3.46). Coefficients for all other variables are
found to be statistically insignificant.
The results of our analysis corroborates with earlier studies in which impact of
FDI on various macro economic parameters in different regions of the countries has
been analysed. Tu, (1990) found that FDI stimulated GDP, private fixed investments
and exports in Taiwan. Kueh, (1992) observed that FDI contributed positively to
capital formation, industrial output and exports of the open coastal regions of China.
Athukorala and Sen, (1995) found that FDI has positive impact on GDP, Exports and
Employment generation in case of Malaysia in the past two decades. Feridum, (2006)
concluded that the economic growth as measured by GDP in Singapore was
significantly caused by the FDI. Lan, (2006) found the positive and statistically
significant impact of FDI on economic growth, exports, domestic investment,
employment, human capital, and technology transfer in Vietnam. Mottaleb, (2007)
estimated very important role of foreign direct investment (FDI) in achieving rapid
economic growth and capital formation in the developing countries by bridging the
gap between domestic savings and investment. Paolino, (2009) observed the positive
impact of foreign direct investment on GDP, domestic investment,
and human
development in China by using ordinary least squared technique for time series data.
Ma, (2009) found significant and positive effect of FDI on GDP in India. Tiwari
(2011) also found positive relationship between FDI and GFCF.
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