Does FDI Generate Employment? An Empirical Study of Indian Service Sector

Abstract

<p>Foreign Direct Investment (FDI) considered as a component of investment is needed by India to accomplish the ambition behind economic reforms and speed up the growth of the economy. The inflow of FDI in India initially was low due to regulatory policy framework but there is a sharp rise in investment flows from 2005 onwards as the new policy has broadened. The purpose of this paper is to look for evidence regarding the precise relationship between FDI inflows and employment in service sector of India. The used Auto-Regressive Distributed Lag (ARDL) model explains long run and short run relationship between FDI inflows and employment in service sector. The empirical results confirm that though negative relationship exists between FDI and employment in service sector but it is not statistically significant. According to the findings, FDI introduces skilled skewed technical changes to the host country, increasing demand for highly skilled employees. Because India’s labour force is relatively unskilled, FDI in the service sector fails to provide jobs for the country’s rising labour force. The ARDL results also confirm the existence of the long run co-integration between FDI and employment in service sector. The finding shows that the stock of the FDI is a significant factor for Indian service sector.</p>