: RESEARCH METHODLOGY

Name- Ananyasparsha – 1712766

Satwak samal- 1712761

Class – 5 BCOM IF
 An Analytical Study of FDI in India

Background

Foreign direct Investment is a controlling ownership of a foreign company in a country other than the one it is
based in. It affects the home country inevitably, But economists do not have a general agreement as to which of
its effects are more: positive or negative. Some term it favorable for economic growth while others disagree and
stand in its opposition. The advocates believe it creates employment opportunities, impart technical skills to the
residents, and, above all, increases the GDP, which we call economic growth, of the country. On the other hand,
it is said that through FDI, these investors manipulate scarce productive resources of the host country; though it
has some positive effects, yet they are minimal as compared with the negative ones. Nonetheless, its effects
desirability varies from country to country. In case of India, it is needed because it can play a significant role in
economic growth.
“An investment in knowledge pays the best interest.”- Benjamin Franklin
Does the above quote make any sense in latest context of Foreign Direct Investment ? The answer is very
simple “YES”. We are living in a global village and everything is on our fingertip. The capacity to understand
the world’s scenario may open many doors.
FDI is a term of investment where one or more companies /people from a particular nation put their capital into
other nation according to their development needs. In more specific words according to International monetary
fund (IMF) the total capital of 10% or more of a foreign company/people into a unit is considered as FDI.
Below this limit is only a shareholding.
To visualize FDI in the Indian context, we have to go into our history. In early 1498 when a Portuguese
explorer, Vasko da Gama arrived at Calicut, he saw the prosperity of Indians. He introduced India in the whole
world. Later people started to visit India. Portuguese, Dutch, British and French established their premises in
India and started trading with Indian people. Sir Tomas Roe was the first British who came as the ambassador
of British emperor and got the permission for trading in Mughal India. After this they created the ‘East India
Company’ and started their business. It was the initial form of FDI in India. Later it went through many changes
according to the world’s financial status and it became more popular as “Foreign Direct Investment” (FDI).

Need for FDI in India:

1. As India is a developing country, capital has been one of the scarce resources that are usually required for
economic development. Due to poverty and low GDP, the savings are low and FDI helps to bring in more
capital. We can invest this capital in new projects for industrialization.
2. Through foreign collaboration we can acquire better technological and managerial skills.
3. The foreign entities can exploit our natural resources from which we can generate revenue.
4. FDI will help in improving the infrastructure.
5. It increases competition in the domestic market thereby leading to a higher productivity, lower price and
more efficient resource allocation.
6. It will help in balance of payment.
Therefore FDI is essential for the economic development of our country.

A major shift occurred when India embarked upon economic liberalization and reforms program in 1991
aiming to raise its growth potential and integrating with world economy. Industrial policy reforms slowly but
surely removed restrictions on investment projects and business expansion on the one hand and allowed
increased access to foreign technology ad funding on the other.
In 2015, India emerged as top FDI destination by attracting FDI of $31 billion surpassing China which had $28
billion and the US which had $27 billion.

Statement of Problem:
Foreign direct Investment is a controlling ownership of a foreign company in a country other than the one it is
based in. It affects the home country inevitably, But economists do not have a general agreement as to which of
its effects are more: positive or negative. Some term it favorable for economic growth while others disagree and
stand in its opposition. The advocates believe it creates employment opportunities, impart technical skills to the
residents, and, above all, increases the GDP, which we call economic growth, of the country. On the other hand,
it is said that through FDI, these investors manipulate scarce productive resources of the host country; though it
has some positive effects, yet they are minimal as compared with the negative ones. Nonetheless, it’s effects
desirability vary from country to country. In case of India, it is needed because it can play a significant role in
economic growth.

H0: FDI does not affect economic growth in case of India.

H1: FDI affects economic growth in case of India.

Research Question:
The main question of this study is whether FDI affects economic growth in case of India.

Objectives of the research:

1. To study the trends and patterns of flow of FDI.
2. To evaluate the impact of FDI on the economy.
Review of Literature:
(Agrawal & Khan, 2011), in their study attempt to investigate the effect of FDI on economic growth of China
and India from 1993-2009. A modified growth model was built from basic growth model. The factors included
in growth model were GDP, Human Capital, Labor Force, FDI and Gross Capital Formation, among which
GDP was dependent variable while rest four were independent variables. After running OLS (Ordinary Least
Square) method of regression it was found that 1% increase in FDI would result in 0.02% increase in GDP of
India.
(Kumar & Karthika, 2010) Found out in their study on “Sectoral Performance through Inflows of FDI”, that
Foreign Direct Investment has a major role to play in the economic development of the host country. Most of
the countries have been making use of foreign investment and foreign technology to accelerate the place of their
economic growth. FDI ensures a huge amount of domestic capital, production level and employment
opportunities in the developing countries, which is a major step towards the economic growth of the country.
(Teli, 2013) made an objective to study the effects of FDI in India for a period of 1991- 2012 by using
correlation technique. The author found that FDI has positive impact on the related economic indicators on
Indian economy.
(Singh & Paul, 2014) in 2014 in the study “FDI in India- Trends, Pattern and Linkage” assessed the trend in
India's FDI after the economic reforms during the last 23 yrs (1990-2012) and also examines the linkage
between Outward FDI, Inward FDI, GDP, Exports and Imports by using the techniques Correlation and
Regression Analysis. The study concluded that IFDI records a positive correlation between the economic
variables (GDP, OFDI & EXPORT). However IFDI did not support the relation with IMPORT. It was observed
from the analysis that FDI helped to raise the output, productivity and employment in some sectors, especially
in the service sector.
(Sahoo & Mathiyazhagan, 2003), in pursuit of finding the effects of FDI on GDP and exports, used the annual
data from 1979-80 to 2000-01. The study used the Johansen co-integration test and came up with the revelation
that a positive correlation existed between FDI in relation to exports and GDP.
(Mottaleb, 2007) assessed the impact of FDI on growth for 60 low and middle income countries and concluded
that large GDP and GDP growth rate are instrumental in attracting FDI Some researchers view FDI as an
instrument for promoting the economic growth of host countries..
(De Mellow, 1992) research in OECD countries concludes that FDI had significantly positive effect on
economic growth for countries with high income.
(De Gregorio, 1992) indicates that at the macro level using aggregate FDI flows for a broad cross-section of
countries – suggests a positive role for FDI in generating economic growth especially in particular
environments.
(Blomstrom, 1992) argues that FDI has a positive growth-effect when the country is sufficiently rich.
(Borensztien, 1998) Identified that FDI has a positive significant effect on economic growth and contributes to
economic growth to countries when the labor force has attained certain level of educational standard.
(Dua & Rashid, 1998) Found a long run relationship between GDP and FDI.
(Laura, 2004) Found that FDI promotes economic growth in economies with sufficiently developed financial
markets.

Contrary to above, the study by (Hanson) reported weak evidence in favor of positive impact of FDI on the host
countries. This paper examines the long-run relationship between outward foreign direct investment (FDI) and
total factor productivity for a sample of 33 developing countries over the period 1980-2005. Using panel co
integration techniques, it was found that: (I) outward FDI has, on average, a positive long-run effect on total
factor productivity in developing countries, (ii) increased factor productivity is both consequence and a cause of
increased outward FDI, and (iii) there are large differences in the long-run effects of outward FDI on total factor
productivity across countries. Cross-sectional regressions indicate that these cross-country differences in the
productivity effects of outward FDI are significantly negatively related to cross-country differences in labor
market regulation, whereas there is no statistically significant association between the productivity effects of
outward FDI and the level of human capital, the level of financial development, or the degree of trade openness
in the home country.
(Pradhan, 2002) Estimates a Cobb-Douglas production function using aggregate data for 1969-97 and finds
that FDI has no significant impact on growth.
(Agrawal P. , 2005) Obtains panel estimates for five South Asian countries, including India, for the period
1965-96 and found that the growth impact of FDI is negligible.
(Chandana & Peter, 2006 ) indicates that FDI has got only a transitory effect on growth in India.
(Balasubramanyam, 2006) indicates that, for India, at present, it is not FDI which promotes growth, but it is
growth which attracts foreign firms, since FDI is one of the several factors which contributes towards growth.
(Singhania & Akshay, 2011) used an ARIMA model-Auto Restricted Integrated Moving Average to explain
the variations in FDI inflows into India, and their results indicates GDP along with other factors like inflation
and scientific research are significant determinant factors for FDI inflow into India.
(Sharmiladevi & Saifilali, 2013) said to increase economic growth of India more foreign direct investment is
required. And in the same line higher inflow of foreign direct investment is enhancing economic growth.
(Sharmiladevi & Saifilali, 2013) found that vital parameters which influences the internal business
environment of a nation like growth rate, inflation, IIP, exports is having a direct influence upon India’s
credibility in the international arena in terms of attracting more FDI.
Conclusion of the reviews
The literatures examined above gives us an indication that, there are increasing number of studies which support
that FDI causes economic growth. Differences in the results can be attributed to factors like, use of different
time series data, treatments given to data for overcoming inbuilt structural breaks and stationary issues,
methodological aspects, models adopted for analysis like Causality analysis, ARIMA models, and vector error
correction/vector auto regression models.

Most of the above studies are of recent ones, where the time period considered was after 1990, that is, after
globalization. But the process of liberalization, globalization and privatization (LPG) has thrown open only the
necessary conditions for the entry of FDI, but in itself LPG has not created the sufficient conditions for
enhancing the prospects of FDI. Materializing the benefits of FDI is a long term process, and it depends upon
many factors like, the existence and establishment of linkages between foreign and local affiliates, inter firm
linkages, absorptive capacity of human resources, motivations behind initiating FDI by individual MNCs,
overcoming socio-cultural environmental differences, government initiatives.

Few research studies give us the direction upon which we need to concentrate for enhancing FDI benefits upon
growth. Research undertaken by (Bajpai & Sachs, 2006) concludes that a restricted FDI regime, high import
tariffs, exit barriers for firms, stringent labor laws, poor quality infrastructure, centralized decision making
processes and a very limited scale of Export Processing Zones make India as an unattractive investment
location. A recent study by (Gould, 2014) concludes that liberalizing policy constraints, modest corporate tax
and improving governance and transparency could help to substantially improve FDI flows to Asian countries.

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