Impact of Foreign Direct Investment on Economic Growth in India: A Co integration Analysis



Abstract: The role of FDI in the growth process has been a burning topic of debate in several countries including India. This paper is an attempt to analyze the causal relationship between Foreign Direct Investment (FDI) and economic growth in India and tries to analyze and empirically estimate the effect of FDI on economic growth in India, using the cointegration approach for the period, 1990-91 to2010-11. The empirical analysis on basis of ordinary Least Square Method suggests that there is positive relationship between foreign direct investment(FDI)investment and GDP and vice versa.  The unit root test clarified that both economic growth and foreign direct investment were found to be integrated of order one using the Kwiatkowski, Phillips, Schmidt and Shinn (KPSS) test for unit root only. The cointegration test confirmed an existence of long run equilibrium relationship between the two as confirmed by the Johansen cointegration test results. The Granger causality test finally confirmed the presence of uni-directional causality which runs from economic growth to foreign direct investment. The error correction estimates gave evidence that the Error-Correction Term is statistically significant and has a negative sign, which confirms that there isn’t any problem in the long-run equilibrium relation between the independent and dependent variables. For FDI to be a noteworthy provider to economic growth, India would do better by focusing on improving infrastructure, human resources, developing local entrepreneurship, creating a stable macroeconomic framework and conditions favourable for productive investments to augment the process of development.


Keywords: FDI, Economic Growth, India, cointegration, granger causality.

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