ABSTRACT – 1MS19MBA18

1. EXECUTIVE SUMMARY:
FDI is the process by which the residents of one country (the source country) acquire the ownership
of assets for the purpose of controlling the production, distribution and other productive activities
of a firm in another country (the host country). Developing economies attract and promote foreign
direct investment in order to supplement domestic capital, technology and skill, for accelerated
economic growth.

Foreign direct investment, has the ‘lasting interest’ in the host country in which the capital inflows
take place as against the Portfolio investment whose stay is short term in nature and often described
as Hot Money. The FDI flows comprise equity and non-equity forms of investment. The equity
capital flows comprise the foreign direct investor purchase of shares of an enterprise and also
include the foreign direct investors share in reinvested earnings. The other two types of FDI include
Market oriented foreign direct investment and export directed investment based on their motives
for entering host economy.

FDI’s utility lies in the fact that investing country usually transfers some of its financial, technical,
managerial, trademark and other resources to the recipient country. FDI has a role in Capital
Formation. FDI is an important source of financing for transition economies as it helps to cover
the current account deficit, fiscal deficit (in case of privatization related FDI), and supplements
inadequate domestic resources to finance both ownership change and capital formation. There are
two sources of Capital Formation which include Domestic and Foreign/External. The domestic
sources of capital formation consists of taxation, profits from the public sector undertakings, deficit
financing, and curbing of international demonstration effect, utilization of disguised
unemployment, voluntary and forced savings. Foreign/External sources consist of foreign aid,
restriction of imports, and improvement in terms of trade for exports, encouraging exports and
external borrowings in the form of loans and advances and lastly foreign investment in domestic
market. FDI investors are cautious regarding the rate of interest/ foreign exchange rate i.e. most
important factor to foreign capital movements is the difference in the rate of interest prevailing at
different places. Conditions influencing private foreign investment include market potential and
infrastructural facilities. The size of the population and the income level of a country have an
important bearing on the market opportunities.

There is strong relationship between privatization and FDI, although this relationship is unequal.
Privatization dominates FDI whereas FDI is not the dominant form of privatization. There is
complementary and substitution relationship between vertically and horizontally integrated
industries respectively. There is strong paired relationship between FDI and Economic growth in
both developed and developing countries. There is stronger invented U-shaped relationship
between MNCs of developed and developing countries. There is curvilinear relationship with FDI
of MNCs & their effect on productivity. Domestic producer lose market share due to significant
and positive relationship between FDI and economic growth. There is negative relationship
between variable and dependent variables, where FDI is variable and GDP, debt, inflation and
trade are dependent variables. Except Debt, all dependent variable showed significant influence
on FDI. There is long term relationship among FDI, international trade and economic growth, also
there is long term relationship between total factor productivity and FDI. There is long run
equilibrium and causal relationship between dependent and independent variable which are FDI
and GDP, GNI respectively. There is bidirectional causality between economic growth and FDI.
There is unidirectional causality from exports to economic growth both in long and short run.

As the world has become a global village and economies across the world have been integrated
through the Globalization phenomena. Indian economy like other developing economies needs
FDI to bolster its size and share in the world economy. Generally, FDI leads to rise in output, labor
productivity and exports. FDI helps in filling the Capital deficiency, expansion of market and
product innovation in the host country in which it enters. Due to structural constraints, the scope
for higher FDI investment is still there especially in the two pillars of the economy viz. Primary
sector and Secondary sector. For FDI to increase exponentially, more needs to be done to Market
the strength of the economy and overhauling its weaknesses.

The major analytical tools used here is Excel and SPSS software where we have operated the t-test
and correlate tools for the analysis of FDI and FDI along with GDP, to find the correlation among
the two and their impact in an economy. We can say that out of our findings being that FDI has
greater impact on the economy of India by overcoming various barriers and government decision
helps the growth of development various sectors and regions in India.
Thus it’s suggested that FDI needs more focus on the developing sectors and find its way to
bringing India more returns (GDP) or growth and stand out.