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The IUP Journal of Applied Economics
Foreign Direct Investment and the Macroeconomy in India
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The present study seeks to identify the determinants of Foreign Direct Investment (FDI) flows into India, and also to understand the structural paths between FDI inflows and macroeconomic variables. While regression models are estimated for identifying the determinants, Structural Equation Modeling (SEM) has been employed to trace the structural paths. The study, based on monthly data from August 1994 to May 2015, finds that exports, savings with commercial banks, money supply, exchange rate and inflation rate stand out as significant determinants of FDI flows into India after globalization. The study also identifies 19 significant paths between FDI inflows and different macroeconomic variables. Finally, the paper discusses some of the policy suggestions for better FDI flow into India.

 
 
 

India has been viewed as one of the largest economies in terms of market size by several developed countries as well as some developing economies. It has been ranked among the top 10 attractive destinations for Foreign Direct Investment (FDI). A trend analysis of FDI data shows 266% growth of FDI from 1991 ($129 mn) to 2014 ($34.4 bn). The rise in FDI has influenced macroeconomic variables such as national income (aggregate and per capita), its growth rate, capital formation, industrial setup, money supply, inflation rate, volume and direction of trade, exchange rates, foreign exchange reserve, etc. Empirical findings also suggest that FDI inflows play a major role in promoting national welfare by enhancing competitiveness, technological advancements and increment in human capital. The benefits of FDI include serving as a source of capital, employment generation, facilitating access to foreign markets, and generating both technological and efficiency spillover to local firms. It is expected that by providing access to foreign markets, transferring technology and generally building capacity in the host-country firms, FDI will inevitably improve the integration of the host country into the global economy and foster growth (Kathuria, 2001).

 
 
 

Applied Economics Jouranl.