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THE DETERMINANTS OF INDIA’S FDI INFLOWS: THE BOUND TEST ANALYSIS
Corresponding Author(s) : Md. Shabbir Alam
Humanities & Social Sciences Reviews,
Vol. 8 No. 2 (2020): March
Abstract
Purpose of the study: This paper aims to empirically examine the determinants of FDI inflows which include policy factors along with macroeconomic aggregates prevailing in India that serve as an important factor for attracting FDI in the country.
Methodology: This paper has applied the Auto Regressive Distributed Lag (ARDL) modeling technique to empirically examine the co-integration relationship among FDI inflows and various macroeconomic aggregates prevailing in India to determine the factors affecting the flow of FDI in India.
Main Findings: The study finds that there exists a co-integration relationship between the variables in the model. The estimated coefficient reveals that FDI inflows in India are positively influenced by trade openness, domestic investment, moderate domestic prices and exchange rate in the long-run. The outcomes also reveal that FDI inflows are positively influenced by the past level of FDI inflows, the past year of GDP per capita, past level of trade openness and currency exchange rate in the country in the short-run.
Applications of the study: The study will be helpful in the formulation of suitable policies towards foreign investment inflows and to optimize its role in the host country. The study will be also helpful to the government for the enrichment of socioeconomic overheads in the host country to maximize the gains from FDI inflows.
The novelty of the Study: The outcome of the study with an addition to the existing literature by incorporating the new variables in the model provides a new variable specific influence on FDI inflows in the country. This will also provide a scope for further study by establishing backward and forward spill over effects of FDI inflows in enhancing income, output, and employment in the country.
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- Alam, M. Qaiser., (2010). Global Financial Crisis and the Indian Economy: Myth and Reality,(Eds.) Global Recession and Economic Recovery by A.K. Thakur, ArunPrabhaChoudhary Rs.95, Deep & Deep Publication Pvt Ltd, New Delhi, 2010. ISBN 978-81-8450-356-2. Pp. 61-68.
- Agarwal J. P.,(1980).Determinants of Foreign Direct Investment: A survey,Weltwirtschaftliches Archive, 116: 739-773. https://doi.org/10.1007/BF02696547 DOI: https://doi.org/10.1007/BF02696547
- Al Nasser O. M. and Gomez X. G., (2009).Do Well-Functioning Financial Systems Affect the FDI Flows to Latin AmericaInternational Research Journal of Finance and Economics, 29: 60-75.
- Aqeel A and Nishat M., (2005). The Determinants of Foreign Direct Investment in Pakistan. 20th Annual PSDE Conference, 1-13.
- Bellack C, Leibrecht M, and Damijan J., (2005). Infrastructure Endowment and Corporate Income Taxes as Determinants of FDI in Central and Eastern European Countries. The World Economy, 32:267-290. https://doi.org/10.1111/j.1467-9701.2008.01144.x DOI: https://doi.org/10.1111/j.1467-9701.2008.01144.x
- Benassy Q. A., Coupet M and Mayer T., (2007). Institutional Determinants of Foreign Direct Investment. The World Economy, 30: 764-782. https://doi.org/10.1111/j.1467-9701.2007.01022.x DOI: https://doi.org/10.1111/j.1467-9701.2007.01022.x
- Borensztein E, Gregorio J. D. and Lee J. W. (1998). How does FDI affect Economic Growth? Journal of International Economics, 45, 115–135. https://doi.org/10.1016/S0022-1996(97)00033-0 DOI: https://doi.org/10.1016/S0022-1996(97)00033-0
- Busse M., Niger K. J., and Nunnenkamp P., (2010). FDI Promotion through Bilateral Investment Treaties: More than a bit? Review of World Economics, 146(1): 147-177. https://doi.org/10.1007/s10290-009-0046-x DOI: https://doi.org/10.1007/s10290-009-0046-x
- Caves R. E.,(1996).Multinational Enterprise and Economic Analysis; Second Edition, Cambridge: Cambridge University Press.doi.org/10.1017/CBO9780511619113.
- Calhoun, K., Yearwood, S, and Willis, A., (2002). The Effect of Wage Rate on Foreign Direct Investment Flows to Individual Developing Countries. Puget Sound eJournal of Economics, Econometrics, 374 Professor Matt Warning, November 2002.
- Contractor F. J. (1991).Do Government Policies Towards Foreign Direct Investment Matter? An Empirical Investigation of the Link between National Policies and FDI Flows. UNCTC Current Series A, No. 21, New York: United Nations.
- Dar H. A. Presley and Malik S. H., (2004). Determinants of FDI inflows to Pakistan over the period of 1970-2002, Loughborough University, Department of Economics, Research Paper, No.4:p.20.
- Deichhman K. S., (2003). Foreign Direct Investment in Turkey: Regional Determinants, Applied Economics; 35(16):1767-1778. https://doi.org/10.1080/0003684032000126780 DOI: https://doi.org/10.1080/0003684032000126780
- Jose D. G., (2003).The role of Foreign Direct Investment and Natural Resources in Economic Development. Central Bank of Chile; Working Paper 196: p.4
- De-Mello S. F., (2009).Competing-destinations Gravity Model: An application to the Geographic distribution of FDI. Applied Economics; Vol.41: 2237–2253, https://doi.org/10.1080/00036840701765346 DOI: https://doi.org/10.1080/00036840701765346
- Donnenfield S and Weber S., (2000). Exporting Versus Foreign Direct Investment. Journal of Economic Integration; Vol. 15: 100-126. https://doi.org/10.11130/jei.2000.15.1.100 DOI: https://doi.org/10.11130/jei.2000.15.1.100
- Dunning, J. H., (1980).Towards an Eclectic Theory of International Production: Some Empirical Tests, Journal of International Business Studies; Vol.11: 9-31. https://doi.org/10.1057/palgrave.jibs.8490593 DOI: https://doi.org/10.1057/palgrave.jibs.8490593
- Dutta, N and Roy, S., (2011). Foreign Direct Investment, Financial Development, and Political Risks. The Journal of Developing Areas. Vol. 44, No. 2 (Spring 2011), pp. 303-327. https://doi.org/10.1353/jda.0.0106 DOI: https://doi.org/10.1353/jda.0.0106
- Egger P and Pfaffermayr M., (2004). Distance, trade, and FDI: A Hausman–Taylor SUR approach, Journal of Applied Econometrics 2004, Vol.19: 227–246. https://doi.org/10.1002/jae.721 DOI: https://doi.org/10.1002/jae.721
- Franklin, Root R., and Ahmed A., (1979).Countries, Economic, 27(4):751-67. https://doi.org/10.1086/451139 DOI: https://doi.org/10.1086/451139
- Froot K and Stein J., (1991). Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach. Quarterly Journal of Economics, 1191-1217. https://doi.org/10.2307/2937961 DOI: https://doi.org/10.2307/2937961
- Galenson W., (1985).Foreign Trade and Investment: Economic Growth in the Newly Industrialized Asian countries, University of Wisconsin Press, Madison.
- Hasen B T and Gianluigi G., (2009).The Determinants of Foreign Direct Investment: A Panel Data Study on AMU Countries, Centre for International Banking Economics and Finance Working Paper,11.
- Hussain F and Kimuli C. K., (2012). Determinants of FDI Flows to Developing Countries.SBP Research Bulletin, Vol. 8:13-19. https://doi.org/10.1016/0022-1996(82)90036-8 DOI: https://doi.org/10.1016/0022-1996(82)90036-8
- Kravis I. B. and Lipsey R.E., (1982). The Location of Overseas Production for Exports by US Multinational Firms. Journal of International Economics; 12: 201-223. DOI: https://doi.org/10.1016/0022-1996(82)90036-8
- Cheng K. L. and Kwan Y., (2000). What are the Determinants of the Location of Foreign Direct Investment? The Chinese experience, Journal of International Economics, 51: 379–400. https://doi.org/10.1016/S0022-1996(99)00032-X DOI: https://doi.org/10.1016/S0022-1996(99)00032-X
- Montiel P. and Reinhart C. M., (1999). Do Capital controls and Macroeconomic Policies influence the volume and composition of capital flows? Evidence from the 1990s, Journal of International Money and Finance, Vol. 18: 619–635. https://doi.org/10.1016/S0261-5606(99)00021-2 DOI: https://doi.org/10.1016/S0261-5606(99)00021-2
- Mottaleb K. A. and Kalirajan, K., (2010). Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis. Australia South Asia Research Centre, WorkingPaper,13.https://crawford.anu.edu.au/acde/. DOI: https://doi.org/10.1177/097380101000400401
- OECD., (2000). Main Determinants and Impacts of Foreign Direct Investment on China's Economy, OECD Working Papers on International Investment, 2000/04, OECD Publishing.
- Othman, N., Yusop, Z., Andaman, G and Ismail, M.M., (2018). Impact of Government Spending on FDI Inflows: The case of ASEAN-5, China and India,International Journal of Business and Society, Vol. 19 No. 2, 2018, 401-414.
- Sin C. Y. and Leung W.F., (2010).Impacts of FDI Liberalization on Investment Inflows,Applied Economic Letter, 8(4): 253-256. https://doi.org/10.1080/135048501750104015 DOI: https://doi.org/10.1080/135048501750104015
- Sung H and Lapan H E. (2000).Strategic Foreign Direct Investment and Exchange-Rate Uncertainty. International Economic Review; 41: 411-423. https://doi.org/10.1111/1468-2354.00069 DOI: https://doi.org/10.1111/1468-2354.00069
- Thompson E R and Poon J.P.H., (2000). ASEAN after the Crisis: Links between Foreign Direct Investment and Regulatory Change. ASEAN Economic Bulletin, 17:14. https://doi.org/10.1355/AE17-1A DOI: https://doi.org/10.1355/AE17-1A
- Tuman J. P. and Emmert C. F., (1999). Explaining Japanese Foreign Direct Investment in Latin America-1979–1992, Social Science Quarterly, 80 (3): 539–55.
- Pesaran M H, Shin Y, and Smith R. J., (2001). Bounds Testing Approaches to the Analysis of Level Relationship. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616 DOI: https://doi.org/10.1002/jae.616
- Schneider F. and Frey B., (1985). Economic and Political Determinants of Foreign Direct Investment, World Development, 13(2):161-175. https://doi.org/10.1016/0305-750X(85)90002-6 DOI: https://doi.org/10.1016/0305-750X(85)90002-6
- Shatz H. and Venables A.J., (2000). The Geography of International Investment. World Bank Policy Research Working Paper WPS-2338. https://doi.org/10.1596/1813-9450-2338 DOI: https://doi.org/10.1596/1813-9450-2338
- Wheeler D. and Mody A., (1992). International Investment Location Decisions: The Case of U.S. Firms. Journal of International Economics,33,57-76, https://doi.org/10.1016/0022-1996(92)90050-T DOI: https://doi.org/10.1016/0022-1996(92)90050-T
- World Investment Report, (2019).World Investment Report Series, United Nations Conference on Trade and Development; UNCTAD, Geneva.
References
Alam, M. Qaiser., (2010). Global Financial Crisis and the Indian Economy: Myth and Reality,(Eds.) Global Recession and Economic Recovery by A.K. Thakur, ArunPrabhaChoudhary Rs.95, Deep & Deep Publication Pvt Ltd, New Delhi, 2010. ISBN 978-81-8450-356-2. Pp. 61-68.
Agarwal J. P.,(1980).Determinants of Foreign Direct Investment: A survey,Weltwirtschaftliches Archive, 116: 739-773. https://doi.org/10.1007/BF02696547 DOI: https://doi.org/10.1007/BF02696547
Al Nasser O. M. and Gomez X. G., (2009).Do Well-Functioning Financial Systems Affect the FDI Flows to Latin AmericaInternational Research Journal of Finance and Economics, 29: 60-75.
Aqeel A and Nishat M., (2005). The Determinants of Foreign Direct Investment in Pakistan. 20th Annual PSDE Conference, 1-13.
Bellack C, Leibrecht M, and Damijan J., (2005). Infrastructure Endowment and Corporate Income Taxes as Determinants of FDI in Central and Eastern European Countries. The World Economy, 32:267-290. https://doi.org/10.1111/j.1467-9701.2008.01144.x DOI: https://doi.org/10.1111/j.1467-9701.2008.01144.x
Benassy Q. A., Coupet M and Mayer T., (2007). Institutional Determinants of Foreign Direct Investment. The World Economy, 30: 764-782. https://doi.org/10.1111/j.1467-9701.2007.01022.x DOI: https://doi.org/10.1111/j.1467-9701.2007.01022.x
Borensztein E, Gregorio J. D. and Lee J. W. (1998). How does FDI affect Economic Growth? Journal of International Economics, 45, 115–135. https://doi.org/10.1016/S0022-1996(97)00033-0 DOI: https://doi.org/10.1016/S0022-1996(97)00033-0
Busse M., Niger K. J., and Nunnenkamp P., (2010). FDI Promotion through Bilateral Investment Treaties: More than a bit? Review of World Economics, 146(1): 147-177. https://doi.org/10.1007/s10290-009-0046-x DOI: https://doi.org/10.1007/s10290-009-0046-x
Caves R. E.,(1996).Multinational Enterprise and Economic Analysis; Second Edition, Cambridge: Cambridge University Press.doi.org/10.1017/CBO9780511619113.
Calhoun, K., Yearwood, S, and Willis, A., (2002). The Effect of Wage Rate on Foreign Direct Investment Flows to Individual Developing Countries. Puget Sound eJournal of Economics, Econometrics, 374 Professor Matt Warning, November 2002.
Contractor F. J. (1991).Do Government Policies Towards Foreign Direct Investment Matter? An Empirical Investigation of the Link between National Policies and FDI Flows. UNCTC Current Series A, No. 21, New York: United Nations.
Dar H. A. Presley and Malik S. H., (2004). Determinants of FDI inflows to Pakistan over the period of 1970-2002, Loughborough University, Department of Economics, Research Paper, No.4:p.20.
Deichhman K. S., (2003). Foreign Direct Investment in Turkey: Regional Determinants, Applied Economics; 35(16):1767-1778. https://doi.org/10.1080/0003684032000126780 DOI: https://doi.org/10.1080/0003684032000126780
Jose D. G., (2003).The role of Foreign Direct Investment and Natural Resources in Economic Development. Central Bank of Chile; Working Paper 196: p.4
De-Mello S. F., (2009).Competing-destinations Gravity Model: An application to the Geographic distribution of FDI. Applied Economics; Vol.41: 2237–2253, https://doi.org/10.1080/00036840701765346 DOI: https://doi.org/10.1080/00036840701765346
Donnenfield S and Weber S., (2000). Exporting Versus Foreign Direct Investment. Journal of Economic Integration; Vol. 15: 100-126. https://doi.org/10.11130/jei.2000.15.1.100 DOI: https://doi.org/10.11130/jei.2000.15.1.100
Dunning, J. H., (1980).Towards an Eclectic Theory of International Production: Some Empirical Tests, Journal of International Business Studies; Vol.11: 9-31. https://doi.org/10.1057/palgrave.jibs.8490593 DOI: https://doi.org/10.1057/palgrave.jibs.8490593
Dutta, N and Roy, S., (2011). Foreign Direct Investment, Financial Development, and Political Risks. The Journal of Developing Areas. Vol. 44, No. 2 (Spring 2011), pp. 303-327. https://doi.org/10.1353/jda.0.0106 DOI: https://doi.org/10.1353/jda.0.0106
Egger P and Pfaffermayr M., (2004). Distance, trade, and FDI: A Hausman–Taylor SUR approach, Journal of Applied Econometrics 2004, Vol.19: 227–246. https://doi.org/10.1002/jae.721 DOI: https://doi.org/10.1002/jae.721
Franklin, Root R., and Ahmed A., (1979).Countries, Economic, 27(4):751-67. https://doi.org/10.1086/451139 DOI: https://doi.org/10.1086/451139
Froot K and Stein J., (1991). Exchange Rates and Foreign Direct Investment: An Imperfect Capital Markets Approach. Quarterly Journal of Economics, 1191-1217. https://doi.org/10.2307/2937961 DOI: https://doi.org/10.2307/2937961
Galenson W., (1985).Foreign Trade and Investment: Economic Growth in the Newly Industrialized Asian countries, University of Wisconsin Press, Madison.
Hasen B T and Gianluigi G., (2009).The Determinants of Foreign Direct Investment: A Panel Data Study on AMU Countries, Centre for International Banking Economics and Finance Working Paper,11.
Hussain F and Kimuli C. K., (2012). Determinants of FDI Flows to Developing Countries.SBP Research Bulletin, Vol. 8:13-19. https://doi.org/10.1016/0022-1996(82)90036-8 DOI: https://doi.org/10.1016/0022-1996(82)90036-8
Kravis I. B. and Lipsey R.E., (1982). The Location of Overseas Production for Exports by US Multinational Firms. Journal of International Economics; 12: 201-223. DOI: https://doi.org/10.1016/0022-1996(82)90036-8
Cheng K. L. and Kwan Y., (2000). What are the Determinants of the Location of Foreign Direct Investment? The Chinese experience, Journal of International Economics, 51: 379–400. https://doi.org/10.1016/S0022-1996(99)00032-X DOI: https://doi.org/10.1016/S0022-1996(99)00032-X
Montiel P. and Reinhart C. M., (1999). Do Capital controls and Macroeconomic Policies influence the volume and composition of capital flows? Evidence from the 1990s, Journal of International Money and Finance, Vol. 18: 619–635. https://doi.org/10.1016/S0261-5606(99)00021-2 DOI: https://doi.org/10.1016/S0261-5606(99)00021-2
Mottaleb K. A. and Kalirajan, K., (2010). Determinants of Foreign Direct Investment in Developing Countries: A Comparative Analysis. Australia South Asia Research Centre, WorkingPaper,13.https://crawford.anu.edu.au/acde/. DOI: https://doi.org/10.1177/097380101000400401
OECD., (2000). Main Determinants and Impacts of Foreign Direct Investment on China's Economy, OECD Working Papers on International Investment, 2000/04, OECD Publishing.
Othman, N., Yusop, Z., Andaman, G and Ismail, M.M., (2018). Impact of Government Spending on FDI Inflows: The case of ASEAN-5, China and India,International Journal of Business and Society, Vol. 19 No. 2, 2018, 401-414.
Sin C. Y. and Leung W.F., (2010).Impacts of FDI Liberalization on Investment Inflows,Applied Economic Letter, 8(4): 253-256. https://doi.org/10.1080/135048501750104015 DOI: https://doi.org/10.1080/135048501750104015
Sung H and Lapan H E. (2000).Strategic Foreign Direct Investment and Exchange-Rate Uncertainty. International Economic Review; 41: 411-423. https://doi.org/10.1111/1468-2354.00069 DOI: https://doi.org/10.1111/1468-2354.00069
Thompson E R and Poon J.P.H., (2000). ASEAN after the Crisis: Links between Foreign Direct Investment and Regulatory Change. ASEAN Economic Bulletin, 17:14. https://doi.org/10.1355/AE17-1A DOI: https://doi.org/10.1355/AE17-1A
Tuman J. P. and Emmert C. F., (1999). Explaining Japanese Foreign Direct Investment in Latin America-1979–1992, Social Science Quarterly, 80 (3): 539–55.
Pesaran M H, Shin Y, and Smith R. J., (2001). Bounds Testing Approaches to the Analysis of Level Relationship. Journal of Applied Econometrics, 16(3), 289–326. https://doi.org/10.1002/jae.616 DOI: https://doi.org/10.1002/jae.616
Schneider F. and Frey B., (1985). Economic and Political Determinants of Foreign Direct Investment, World Development, 13(2):161-175. https://doi.org/10.1016/0305-750X(85)90002-6 DOI: https://doi.org/10.1016/0305-750X(85)90002-6
Shatz H. and Venables A.J., (2000). The Geography of International Investment. World Bank Policy Research Working Paper WPS-2338. https://doi.org/10.1596/1813-9450-2338 DOI: https://doi.org/10.1596/1813-9450-2338
Wheeler D. and Mody A., (1992). International Investment Location Decisions: The Case of U.S. Firms. Journal of International Economics,33,57-76, https://doi.org/10.1016/0022-1996(92)90050-T DOI: https://doi.org/10.1016/0022-1996(92)90050-T
World Investment Report, (2019).World Investment Report Series, United Nations Conference on Trade and Development; UNCTAD, Geneva.