Foreign direct investment and growth in India: a cointegration approach

Abstract

The two-way link between foreign direct investment and growth for India is explored using a structural cointegration model with vector error correction mechanism. The existence of two cointegrating vectors between GDP, FDI, the unit labour cost and the share of import duty in tax revenue is found, which captures the long run relationship between FDI and GDP. A parsimonious vector error correction model (VECM) is then estimated to find the short run dynamics of FDI and growth. Our VECM model reveals three important features: (a) GDP in India is not Granger caused by FDI; the causality runs more from GDP to FDI; (b) trade liberalization policy of the Indian government had some positive short run impact on the FDI flow; and (c) FDI tends to lower the unit labour cost suggesting that FDI in India is labour displacing.

Model of Causality Between Fdi and Gross Domestic Product on Asean-5 Countries From 1980-2014

“…This particular finding is supported by the previous research including by Chakraborty and Basu (2002) in India, by Ang (2008) for Furthermore, a stable macroeconomic condition also determines the direction of causality in Malaysia as can be seen from such macroeconomic variables as inflation, interest rate, exchange rate and unemployment rate. Malaysia's inflation rate can be kept low.…”

“…FDI-driven growth requires the growth of market size to attract FDI. This hypothesis is empirically supported by the research of Chakraborty and Basu (2002), and Pradhan (2008) that showed the pattern of relationship FDI-driven growth. In addition, Ang (2008) investigated the relationship between two variables.…”

“…The good economic performance of the recipient country provides better infrastructure facilities and opportunity to obtain higher profit. This hypothesis is supported by several studies showing that a relatively high increase in GNP is able to attract higher FDI flow into the host country as Chakraborty and Basu (2002) research in the context of India employing the VECM method for determining the short-term dynamic interaction between two variables. The empirical result showed that causality flow from real GDP to FDI.…”

The Relation Between Economic Growth and Foreign Direct Investment During the Economic Crisis in the European Union

“…Few studies, like those of Chakraborty and Basu (2002) for India, found little or no evidence for FDI contributing to economic growth. Actually, a faster economic growth attracts more FDI inflows (Choi, 2004;Carkovic and Levine, 2002, Kherfi and Soliman, 2005, Fidrmuc and Kostagianni, 2015, Cichy and Gradoń, 2016.…”

Impact of Foreign Direct Investment Inflows on Capital Account of India’s Balance of Payments

“…FDI and its impact have drawn attention of scholars but lately. Chakraborty and Basu (2002) suggest that GDP in India is not Granger caused by FDI and the causality runs more from GDP to FDI. Still it does not build a relationship between FDI Inflows and BOP.…”