G Bharathi Kamath*
The purpose of the paper is to estimate and analyze the impact of Foreign Direct Investment (FDI) on Gross Domestic Product (GDP) and exports in India for the post-liberalization period (1991-2005). The relevant data is collected for a 15-year period from 1991-2005 from various published sources such as World Investment Report (WIR) and Secretariat for Industrial Assistance (SIA). The data is then analyzed using simple linear regression analysis to find the impact of FDI on various variables. Growth rates are evaluated and trends are analyzed using various tools. This study establishes the relationship between the FDI inflows and exports and GDP in the Indian economy. A greater inflow of foreign capital has lead to growth in the exports of goods and services and also growth of the economy over the period of study. These results have great policy implications giving a direction to the policymakers that further liberalization attempts can be made without apprehensions about its impact on the overall economic growth and balance of trade.
Since the end of World War II, economists have pointed to the growing interdependence among countries in the world economy. This trend of interdependence has seen exponential growth. Since late 1980s till date, the growth of FDI has been one of the most debated and significant economic developments. In Asia, FDI has increased significantly over the past two decades. However, it has been concentrated in a few countries. In the early 1990s, seven East Asian countries—China, Korea, Singapore, Indonesia, Malaysia, Philippines and Thailand—received more than 60% of the FDI inflows compared to the other countries in Asia. The BRIC (Brazil, Russia, India, and China) report states that India is going to be one of the most popular destinations for FDI from across the globe. However, the preliminary question is whether this inflow is going to lead to any growth in the domestic economy and exports; if yes, how much? and will it be significant enough to drive further FDI inside the economy?
Relevance of FDI
Foreign direct investment in the developing countries dates back to the 19th century. During the colonial and neocolonial period, it was concentrated in export-oriented mineral and agricultural production and in public utilities. However, there were economic and political opportunities to foreign investment in the colonial countries. There was growing opposition to * Assistant Professor, The Icfai Business School, Mangalore, India. E-mail: email@example.com 16 2008 The Icfai University Press. All Rights Reserved. International Business, Vol. III, No. 4, 2008 The Icfai University Journal of ©
investment from abroad in Canada and Australia in the 1920s and 1930s. The same was true in Europe in the 1950s when American inflows were at their peak and European outflows were still negligible. Japan simply kept foreign investors out (Billerbeck and Yasugi, 1978). In the 1950s, after the end of World War II, FDI from the industrialized countries to developing countries began to flow again. By the end of 1960s, average annual flows to developing countries, including reinvested earnings, were $3 bn. By 1975, the rate of investment accelerated and reached $10 bn (Billerbeck and Yasugi, 1978). FDI inflows more than doubled in nominal terms between 1975 and 1985, attaining a peak in 1981 and rising thereafter at an annual average rate of 43%, to reach a record high level of about $215 bn in 1990 (Bhalla, 1994). Increases in FDI inflows exceeded the growth in nominal value of world GDP and international trade, which expanded by around 3.5% and 7% respectively in 2006 (WIR, 1997).
Definition of FDI
Foreign direct investment is defined as an investment involving a long-term business relationship and reflecting a lasting interest and control of resident entity in one economy (foreign direct investor or parent...