Economic Reforms, Foreign Direct Investment and its Economic Effects in India
AbstractForeign direct investment (FDI) has boomed in post-reform India. Moreover, the composition and type of FDI has changed considerably since India has opened up to world markets. This has fuelled high expectations that FDI may serve as a catalyst to higher economic growth. We assess the growth implications of FDI in India by subjecting industry-specific FDI and output data to Granger causality tests within a panel cointegration framework. It turns out that the growth effects of FDI vary widely across sectors. FDI stocks and output are mutually reinforcing in the manufacturing sector. In sharp contrast, any causal relationship is absent in the primary sector. Most strikingly, we find only transitory effects of FDI on output in the services sector, which attracted the bulk of FDI in the post-reform era. These differences in the FDI-growth relationship suggest that FDI is unlikely to work wonders in India if only remaining regulations were relaxed and still more industries opened up to FDI.
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1272.
Length: 43 pages
Date of creation: Mar 2006
Date of revision:
foreign direct investment; economic reform; growth effects; India; cointegration; causality;
Find related papers by JEL classification:
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-25 (All new papers)
- NEP-CWA-2006-03-25 (Central & Western Asia)
- NEP-DEV-2006-03-25 (Development)
- NEP-FDG-2006-03-25 (Financial Development & Growth)
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- Abdul Khaliq & Ilan Noy, 2007. "Foreign Direct Investment and Economic Growth: Empirical Evidence from Sectoral Data in Indonesia," Working Papers, University of Hawaii at Manoa, Department of Economics 200726, University of Hawaii at Manoa, Department of Economics.
- David Mayer Foulkes., 2007. "Subdesarrollo y globalización," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 155-192, May.
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