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Economic reforms, foreign direct investment and its economic effects in India

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  • Chakraborty, Chandana
  • Nunnenkamp, Peter

Abstract

Foreign 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.

Suggested Citation

  • Chakraborty, Chandana & Nunnenkamp, Peter, 2006. "Economic reforms, foreign direct investment and its economic effects in India," Kiel Working Papers 1272, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1272
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    2. Nakije Kida, 2014. "Reasons Why it is Beneficial to Invest in Republic of Kosovo," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 10(3), pages 17-34, June.
    3. Edward Nketiah-Amponsah & Bernard Sarpong, 2019. "Effect of Infrastructure and Foreign Direct Investment on Economic Growth in Sub-Saharan Africa," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 11(3), pages 183-201, September.
    4. Marwa Lazreg & Ezzeddine Zouari, 2018. "The nexus between FDI and environmental sustainability in North Africa," Working Papers hal-01756732, HAL.
    5. Md. Noman Siddikee & Mohammad Mafizur Rahman, 2021. "Foreign Direct Investment, Financial Development, and Economic Growth Nexus in Bangladesh," The American Economist, Sage Publications, vol. 66(2), pages 265-280, October.
    6. Mohamed Abdouli and Sami Hammami, 2017. "Exploring Links between FDI Inflows, Energy Consumption, and Economic Growth: Further Evidence from MENA Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 42(1), pages 95-117, March.
    7. Abdul Khaliq & Ilan Noy, 2007. "Foreign Direct Investment and Economic Growth: Empirical Evidence from Sectoral Data in Indonesia," Working Papers 200726, University of Hawaii at Manoa, Department of Economics.
    8. Molintas, Dominique Trual, 2015. "Globalisation & Emerging Markets: The case of India," MPRA Paper 96947, University Library of Munich, Germany.
    9. 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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    More about this item

    Keywords

    Economic reform; Growth effects; India; Cointegration; Causality; Foreign direct investment;
    All these keywords.

    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, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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