A bivariate causality link between foreign direct investment and economic growth

Abstract

Purpose -The purpose of this paper is to examine the causal relationship between economic growth and foreign direct investment (FDI) in context of India. Design/methodology/approach -Using Toda-Yamamoto granger causality technique, authors tried to examine the causal link between GDP per capita (proxy for economic growth) and FDI. The data is tested for stationarity using Augmented Dickey-Fuller test and Phillips Peron test. Authors also examined the co integration properties using Johansen test to identify long run relationship between the two variables. Findings -It was found that GDP per capita and FDI are integrated in long run. There also exist a bidirectional between FDI and growth in post liberalization period, i.e. post 1991. There is also evidence of FDI led growth in the pre-liberalization period, i.e. pre 1991.Research limitations/implications -There are many factors which contribute to FDI and GDP per capita. A comprehensive study can be done to explore other determinants of FDI and GDP per capita. Practical implications -The findings reveal that economic growth measured by GDP per capita has become one of the important determinants of FDI after liberalization. The evidence of FDI led growth in both the periods signifies that policy makers should ensure a minimum level of economic growth to maintain India as an attractive destination for FDI. The policy should lay emphasis on business facilitation measures like improving the conditions for doing business in India, expanding the role of investment promotion agencies (IPAs) and providing single window for foreign investment. Originality/value -There exists cross-sectional studies on examining relationship between FDI and growth. However, there is a need to have country level study to identify FDI and growth nexus as it is sensitive to country specific factors which are unobservable in time series analysis of group of countries.

Infrastructure Development and FDI Inflow to Developing Economies: Evidence from India

“…In recent times, cross‐border investment has gained significant momentum and developing economies are becoming the preferred destinations for FDI inflow. In spite of certain apprehensions about FDI, its role in economic development is broadly beneficial (Kaur, Yadav, & Gautam, ). We drew insight from Dunning's eclectic paradigm (1977, 1979) and argue that well‐developed infrastructure facilities provide a supportive environment for foreign investors.…”

Effects of export and technology on economic growth: Selected emerging Asian economies

“…The study suggests that export promotion and adoption policies are most useful for China and other developing and transitional economies. Kaur, Yadav, and Gautam (2013) discuss for the Indian economy that there is a bidirectional causal association between FDI and economic growth. Moreover, they reveal FDI-led growth in pre-liberalisation and post-liberalisation of 1991.…”

Foreign Direct Investment and Economic Growth in India: A Sector-specific Analysis

“…A rigorous review of extant studies on sector-specific FDI-growth relationship gives us mixed results and largely inconclusive findings from different economies perspectives including India. Another notable gap in the literature is that, where much of the research efforts have been directed towards establishing the impact of FDI on overall economic growth of emerging and developed economies (Borensztein et al, 1998; Griffin, 1970; Kaur et al, 2013; Li & Liu, 2005; Rodan, 1961; Singer, 1950; Weisskof, 1972), limited efforts have been made to understand the sector-specific differential impact of FDI inflow considering the sectoral heterogeneity. Under this study, our analysis on the effect of FDI on economic growth adds a sectoral dimension through which the FDI-growth relationship can be modelled within a changing sectoral specification.…”

“…Therefore, high cross-sectoral versatility in the economic activity varied contribution towards growth, and heterogeneity in individual characteristics require a specific treatment for each sector while correlating with FDI (Aykut & Sayek, 2007). In India, where FDI-economic growth nexus has been examined several times by different scholars (Gupta & Garg, 2015; Kaur, Yadav, & Gautam, 2013; Sahu & Pandey, 2018), to our knowledge, very limited effort has been undertaken to make a sector-specific analysis. Besides, the sectoral differences in terms of economic contribution, linkage and spillover potential, dependency on external factors and so on are larger in case of Indian economy than most of the other emerging economies.…”