Impact of FDI in India

7/30/2019 Impact of FDI in India

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Impact of Foreign Direct Investmentin India

G Bharathi Kamath*

* Assistant Professor, The Icfai Business School, Mangalore, India. E-mail: [email protected]

The purpose of the paper is to estimate and analyze the impact of Foreign DirectInvestment (FDI) on Gross Domestic Product (GDP) and exports in India for thepost-liberalization period (1991-2005). The relevant data is collected for a 15-yearperiod from 1991-2005 from various published sources such as World InvestmentReport (WIR) and Secretariat for Industrial Assistance (SIA). The data is then analyzedusing 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 theIndian economy. A greater inflow of foreign capital has lead to growth in the exportsof goods and services and also growth of the economy over the period of study. Theseresults have great policy implications giving a direction to the policymakers that furtherliberalization attempts can be made without apprehensions about its impact on theoverall economic growth and balance of trade.

Introduction

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 countriesChina, Korea,

Singapore, Indonesia, Malaysia, Philippines and Thailandreceived 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 fromacross 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


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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 enterprise) in an enterprise resident in an economy other than that of the

foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). Foreign direct

investment implies that the investor exerts a significant degree of influence on the management

of the enterprise resident in the other economy. Such investment involves both the initial

transactions between the two entities and subsequent transactions between them and amongforeign affiliates, both incorporated and unincorporated. Foreign direct investments may be

undertaken by individuals as well as business entities (WIR, 1997). The component included

to account the FDI varies from country to country.

Theoretical Background

There are various theoretical foundations that discuss the FDI:

Structuralist Paradigm

Foreign investment is to be welcomed and actually encouraged through tax concessions, etc.

as a source of foreign finance and technology. However, for Raul Prebisch,

such investment should flow into the branches of production in which it is most needed

(Hunt, 1989).

Overlapping Generations Model

The Overlapping Generations (OG) model of long run growth presents a somewhat different

perspective on the effects of foreign investment. This model provides a basic lesson: foreign

investment makes the future generations of the capital-importing country better off and thefuture generations of the capital-exporting country worse off (Bhalla, 1994).


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What happens if there is foreign investment? Interest rates rise in the capital-exporting

country and fall in the capital-importing country. The key fact is the wages of the present

generation depend on the capital stock inherited from previous generations. Since each member

of the present generation earns his or her wages in the first period and retires in the second

period, he or she will be made better off by a higher interest rate on savings and worse off by

a lower interest rate on savings. The wage rate is fixed. Therefore, since investment lowersinterest rates in the capital-importing region in the OG model, the present generation is made

worse off. Interest rates rise in the capital-exporting region, therefore, the present generation in

that region is better off (Roy, 1979).

OLI Paradigm

The most recent of them all is the one given by Dunning popularly known as Eclectic or OLI

paradigm. It discusses about Ownership (O), Location (L), and Internalization (I) advantages

of a countrys firms while differentiating along the countrys course of economic development

(Dunning and Narula, 1998). According to this theory, three conditions have to be fulfilled in

order for a firm to become a multinational: the Ownership (O) advantages must be such as to

make it profitable for the firm to relocate abroad its own production (or at least part of it);

there must be some Localization (L) advantage, typically linked to the host countrys specific

characteristics; and it must be more convenient for the firm to manage its advantages Internally

(I) rather than trade them through the market. This appears to be a very useful paradigm in

explaining the different characteristics that need to be fulfilled for a firm to become a

multinational and also helps in developing further empirical studies on this topic (Soci, 2002).

Macro Perspective

National Income (GDP) is universally employed and is generally a useful measure for economic

growth. A variety of policies for promoting growth can be suggested. Let us start from a simple

equation for GDP.

GDP= C+ I + G + (X M)

where,

C = Consumption

I = Investment

G = Government Expenditure

X = Exports

M = Imports

This leads to the following alternatives (Rao, 1995).

1. Maximize Cthrough tax reduction (supply-side economics).

2. Activate Iboth domestic and foreign.


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3. Stimulate GKeynesian economics (may lead to heavy budget deficits).

4. IncreaseXOutward looking policies (aggressive East Asian economies).

5. Contain MImport substitution (some of the third world economies including

India till recently).

Combination of first, second and fourth alternatives is suggested for a segmented economy

to augment development (Chenery and Ahulwalia, 1974). India seems to have been following

this path since mid-1980s. In the structural adjustment program, exports and foreign capital

started to play a prominent role.

Review of Earlier Works

Foreign capital inflows play an important role in supplementing and complementing resources

of developing countries in their efforts towards higher levels of development. The role offoreign capital has been emphasized in literature on economic development; for instance,

the Gap models (Hunt, 1989) and the Kindleberger-Hymer approach to FDI.

It was Abba Learner who discussed at length about the inflow of foreign capital (Lerner,

1944). The general effects of foreign investment on development received a good treatment in

the works of Mac Dougall (Dougall, 1966). The work of Kemp Murray (Murray, 1960) can also

be mentioned in this respect. However, the question of the possible adverse effects of foreign

capital on the levels of domestic savings was first raised by Trygve Haavelmo (Haavelmo,

1963). Following Haavelmo, many evinced interest in studies on the relationship between

foreign capital and economic growth in developing countries. There was a proliferation of

studies on this and the works of Lee, Rana and Iwasaki in the context of Asia is important (Lee

et al., 1986).

One of the earliest studies on the relationship between FDI and growth is that of Papanek

(Papanek, 1973). Among country-specific studies, the work of Gustav Ranis and Chi Shive on

Taiwan (Ranis and Schive, 1985)is very exhaustive. In 1970, Robert Aliber raised many

theoretical issues like whether FDI is a currency area or customs area phenomena (Aliber,1970). W B Reddaways analysis (Reddaway, 1968) of the influence of FDI on Balance of

Payments (BOP) is a landmark study in the literature on FDI. A more general theoryoriginally

propounded in a thesis at MIT by Stephen Hymeris that direct investment belongs more to

the theory of industrial organization than to the theory of international capital movements.

Hymers work emphasizes that firms engaged in direct investment have monopolistic elements

and the perfect competition model is not relevant. To the literature on FDI, the greatest

contribution was made by Charles, P Kindleberger (Kindleberger, 1958 and 1968). His influence

on subsequent works is so profound that his analysis and approach to FDI along with that ofStephen Hymer is well-known as Kindleberger-Hymer Approach.


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However, there are specific studies that help in understanding the FDI drivers at a regional

level and also have direct use in policymaking (Na and Lightfoot, 2006). Others talk about

development of successful FDI strategies at national level (Musila and Sigue Simon, 2006).

Some simplistic papers look at just the trends of FDI in various countrieswhat they expect to

measure is the general perspective without exploring in detail what are the implications of

these investments on the national growth and other parameters. There are studies pertaining tofirm-level analysis of the determinants (Pantelidis and Dimitrios, 2005) and one paper deals

with specific determinants of US FDI in India (Balasundram and Chatterjee, 1998).

Objectives of the Present Study

The main objectives of the present work are:

To examine trends in FDI in India; and

To analyze the impact of FDI on exports and GDP.

Methodology

Period of Study

The period of analysis for the present study is 1986-87 to 2005-06. Depending on the availability

of the data, the analysis is confined to this broad period. However, the focus of analysis is

mostly on post-liberalization period of 1991-2005 and 2005-06, as FDI data is consistently

available since this period.

Hypothesis

One of the benefits of FDI is that it is likely to transfer modern technology to the domestic

economy. As a result, the products produced in the domestic economy would become

internationally competitive. The inflow of FDI is likely to promote the exports. Thus, both

GDP and exports are expected to be positively influenced by FDI.

Sources of Data

The data for this work are taken from a variety of sources. The publications of SIA of Ministry

of Industry, Government of India are the main sources of information for data on FDI flows,country-wise break-up and sector-wise break-up. The RBI online database on the Indian economy

is another major source of data. Data on aggregate FDI is taken from World Investment Report

of United Nations and Reserve Bank of India (RBI) Annual Report.

Techniques of Estimation

Simple techniques like percentages and growth rates are employed to analyze data. However,

for capturing the impact of FDI on exports, imports, and GDP, the paper has used mean,

standard deviation, and simple regression analysis.

Y = a + bX


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where,

Y = Dependent variable.

a = Intercept of the line on y-axis.

b = Regression coefficient

X = Independent variable.

Thus, the following three simple linear regression equations would be analyzed to study

the impact of FDI on exports, imports and GDP.

X = a1+ b

1FDI ...(1)

M = a2+ b

2FDI ...(2)

Y = a3+ b

3FDI ...(3)

where,

X = Exports

M = Imports

Y = GDP

And a and b are the coefficients of FDI.

All the related statistics are estimated for analysis.

Analysis

In this section a detailed analysis of the impact of FDI on exports and GDP along with the

analysis of trends of FDI in India is attempted.

Analysis of Trends

Foreign investment plays an important part in economic development and is often an essential

element in economic transformation of developing countries. As can be seen from Table 1,

the flow of FDI across the world has seen a tremendous growth over the period of 20 years.

This reflects the fact that most economies are moving from relatively closed economies to

open economies. Also, it is positive to notice that the inflows are increasing in the developing

countries over the period. The share of developed countries was almost three-fourth in 1985,

and it remains at 60% of the world flows in 2005. Europe and the US dominated the scenario

for a very long time; but their share was on a decline in the recent past. On the other hand, the

share of developing economies has seen a gradual and healthy increase over the period;

it increased from a meager one-fourth to a dominating 36%. However, what needs to be noted

here is that there is no single country which attracts as big an investment as developed economiesdo. However, Asian economies are doing better than Latin American countries and Africa.


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Table1:InwardFDIFlows,b

yHostRegionandEconomy

,1985-2005

1985

1990

1991

1995

1997

1998

1999

2000

20

01

2002

2003

2

004

2005

World

57959.41

201613.85

15480

1.20

340336.10

489709.18

712031.96

1099919.16

1409567.77

83224

7.63

617731.56

557869.01

7107

54.69

916276.63

Deve

loped

42687.19

164807.82

11212

8.02

219030.98

284252.11

506205.77

851182.62

1133683.25

59927

1.78

441237.87

358538.84

3961

44.95

542311.83

Economies

%of

World

73.65

81.74

7

2.43

64.36

58.05

71.0

9

77.39

80.43

72.01

71.43

64.27

55.74

59.19

Europe

16706.33

97043.84

7922

5.38

133650.56

153832.74

296663.49

522511.80

721613.84

39314

2.90

314168.02

274095.48

2176

95.91

433628.10

%of

World

28.82

48.13

5

1.18

39.27

31.41

41.6

6

47.50

51.19

47.24

50.86

49.13

30.63

47.33

Unite

d

5668.30

30461.12

1484

6.17

19969.45

33226.59

74321.33

87978.94

118764.29

5262

3.24

24029.45

16777.91

562

14.07

164529.69

Kingd

om

%of

World

9.78

15.11

9.59

5.87

6.78

10.4

4

8.00

8.43

6.32

3.89

3.01

7.91

17.96

North

21862.41

56004.28

2567

9.96

68026.77

114925.02

197243.32

308119.39

380798.00

18712

4.00

96612.50

60761.00

1239

10.40

133264.90

America

%of

World

37.72

27.78

1

6.59

19.99

23.47

27.7

0

28.01

27.02

22.48

15.64

10.89

17.43

14.54

US

20490.00

48422.00

2279

9.00

58772.00

103398.00

174434.0

0

283376.00

314007.00

15946

1.00

74457.00

53146.00

1223

77.00

99443.00

%of

World

35.35

24.02

1

4.73

17.27

21.11

24.5

0

25.76

22.28

19.16

12.05

9.53

17.22

10.85

Other

4118.44

11759.71

722

2.68

17353.65

15494.36

12298.9

6

20551.43

31271.40

1900

4.88

30457.35

23682.35

545

38.63

-24581.17

Deve

loped

Economies

%of

World

7.11

5.83

4.67

5.10

3.16

1.73

1.87

2.22

2.28

4.93

4.25

7.67

2.68

Deve

loping

15257.23

36731.12

4243

8.66

116502.03

193355.99

195174.25

238266.00

266822.92

22144

7.25

163582.61

175138.03

2750

32.42

334285.44

Economies

%of

World

26.32

18.22

2

7.41

34.23

39.48

27.4

1

21.66

18.93

26.61

26.48

31.39

38.70

36.48

Africa

2443.32

2825.62

353

9.91

5641.80

10948.26

9279.89

12454.91

9577.33

19894.32

12999.27

18512.52

171

98.74

30671.96

%of

World

4.22

1.40

2.29

1.66

2.24

1.30

1.13

0.68

2.39

2.10

3.32

2.42

3.35

Latin

7302.60

10566.92

1427

6.25

30250.82

76259.00

90311.63

114107.95

108992.60

8939

7.04

54339.62

46136.92

1005

05.86

103662.63

America

andthe

Carib

bean

%of

World

12.60

5.24

9.22

8.89

15.57

12.68

10.37

7.73

10.74

8.80

8.27

14.14

11.31

(Con

td...)

(inUS$mn)


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,1985-2005

1985

1990

1991

1995

1997

1998

1999

2000

20

01

2002

2003

2

004

2005

Asiaa

nd

5511.30

23338.58

24622.50

80609.40

106148.73

95582.7

3

111703.14

148252.99

11215

5.89

96243.72

110488.58

1573

27.82

199950.85

Oceania

%ofWorld

9.51

11.58

15.91

23.69

21.68

13.4

2

10.16

10.52

1

3.48

15.58

19.81

22.14

21.82

Asia

5421.41

22642.36

24154.07

79918.01

105772.63

95249.4

6

111285.32

147992.76

11204

4.89

96124.85

110136.74

1566

22.32

199553.64

%ofWorld

9.35

11.23

15.60

23.48

21.60

13.3

8

10.12

10.50

1

3.46

15.56

19.74

22.04

21.78

South

-East

15.00

74.91

234.51

4803.09

12101.08

10651.9

4

10470.54

9061.61

11528.61

12911.09

24192.15

395

77.32

39679.36

Europ

eand

theCommon-

wealt

hof

Indep

endent

States

(CIS)

%ofWorld

0.03

0.04

0.15

1.41

2.47

1.5

0

0.95

0.64

1.39

2.09

4.34

5.57

4.33

(...

con

td)

Source:WorldInvestm

entReport2006(percentagesestimated).

FDI is also seen to increase as a

percentage of the GDP of the economies.

On the whole, FDI forms around 22% of

the GDP of all the economies of the world.

As shown in Table 2, the developed countries

are moving closely with the world average.Whereas, the developing economies are

improving very fast and their share is steady

in the recent years. United Kingdom among

the developed economies and Hong Kong,

China in the developing economies are the

top destinations of FDI (Table 2). The

economy of Hong Kong is overwhelmingly

attracting foreign investments followed by

Singapore and Vietnam in South-East Asia.

India is slowly picking up the speed as far as

FDI is concerned; it started with a meager

0.33% and is presently at around 6%.

Among the developing economies, all the

continents are faring equally as far as this

parameter is concerned.

Asian Perspective

Foreign capital is treated as a resource

gap-filling factor in the context of capital

scarcity in the developing countries.

In developing countries, FDI is now the

principal source of foreign capital. There are

good reasons to believe that FDI is preferred

to other types of flows. One convincing

argument is that FDI consists of a package

of capital, technology and market access

which tends to go to those manufacturing

sectors which enjoy actual or potential

comparative advantage (Edward, 1992).

The inflow of FDI would give rise to

economies of scale and higher productivity

and create linkage effects in these sectors

(Edward, 1992). With the inflow of FDI,

profitability and outward remittance of profitsand dividends move in close tandem with

(inUS$mn)


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Table2:InwardFDIS

tockasaPercentageofGros

sDomesticProduct,byHost

RegionandEconomy,1985-2005

(Con

td...)

Regio

n/Economy

1985

1995

1996

19

97

1998

1999

2000

2001

2002

2003

2004

2005

World

6.95

9.40

10.26

11.76

14.01

15.95

18.35

19.80

20.92

22.50

23.30

22.67

Deve

lopedEconomies

6.44

8.92

9.67

10.36

12.47

13.54

16.23

17.57

19.36

21.09

22.05

21.40

Europ

e

9.97

13.13

13.85

15.22

19.07

20.64

26.38

28.44

31.83

33.89

34.94

33.48

UnitedKingdom

14.06

17.62

19.22

19.07

23.73

26.36

30.50

35.40

33.44

33.72

33.32

37.10

North

America

5.49

8.31

8.74

9.21

9.91

11.46

14.02

14.45

14.07

14.34

14.51

14.56

UnitedStates

4.41

7.29

7.70

8.26

8.95

10.37

12.87

13.34

12.89

12.88

13.03

13.02

OtherDevelopedCountries

2.34

2.91

3.53

3.45

3.93

4.35

3.94

4.40

6.02

7.29

8.15

7.32

Deve

lopingEconomies

8.93

12.22

13.28

17.53

20.57

25.91

26.26

28.07

26.74

27.77

27.93

27.00

Africa

10.45

16.72

16.43

17.56

19.32

26.98

25.99

26.56

29.82

30.40

29.94

28.20

Latin

AmericaandtheCaribbean

9.26

11.05

12.68

15.47

18.66

24.29

25.84

31.82

33.99

36.78

37.64

36.65

AsiaandOceania

8.31

12.15

13.14

18.67

21.95

26.56

26.51

26.37

23.30

23.88

23.88

23.15

Asia

8.26

12.12

13.11

18.66

21.95

26.57

26.51

26.37

23.29

23.88

23.89

23.15

West

Asia

11.32

8.02

7.80

8.31

8.99

8.88

8.52

9.66

9.22

11.82

11.38

11.88

EastA

sia

8.24

12.26

13.19

23.27

25.47

34.04

33.98

33.34

27.64

28.09

28.34

26.99

Chin

a

2.04

14.44

15.69

17.14

18.51

18.78

17.89

17.28

17.04

16.12

14.88

14.29

HongKong,China

75.24

50.07

51.52

143.59

136.21

252.29

275.44

257.53

210.25

243.39

275.21

299.88

Kore

a,DemocraticPeoplesRepublicof

13.36

6.57

9.80

10.31

9.98

9.83

9.45

8.58

9.17

10.09

10.70

Kore

a,Republicof

2.24

1.83

2.06

2.74

5.56

6.47

7.32

8.58

8.11

7.94

8.24

7.97

South

Asia

0.91

2.54

3.27

4.14

4.70

4.53

4.66

4.78

5.45

5.62

6.04

6.23

India

0.33

1.54

2.11

2.54

3.33

3.43

3.77

4.20

5.00

5.18

5.68

5.84

Pakistan

3.01

7.27

9.36

12.74

11.79

10.18

9.78

8.25

8.29

8.48

8.77

8.78

SriLanka

8.84

9.95

10.16

12.24

12.73

14.09

9.80

9.71

10.44

10.72

11.31

10.41


10/24

the performance of the economy and the

balance of payments (Siow, 1993).

Coming to the scenario in Asia, a few

economies are attracting heavy inflows and

others remain low players. As can be seen

from Table 3, Asia contributes aroundone-fifth of the worlds FDI. South, East and

South-East Asia contribute almost four-fifth

of the total inflows directed at this region.

However, there is a huge skewness in favor

of some economies in East Asia, with China

dominating the scene among all the

economies. The internal policy framework

and the conducive environment for the

foreign investors have been very fruitful over

the period for China. South Asia is among

the deprived region in entire Asia, with India

contributing only around 3% to the regions

inflow in the year 2005. Singapore and

Thailand are among other economies in this

region that attract a large inflow of direct

investments.

Looking again at the world scenario, we

can see in Table 4 the trends as far as sectoralinflows of FDI across the developed and

developing economies are concerned. There

is a clear indication that most FDI flows are

in the manufacturing sector, and the service

sector has picked up in the later years. Most

economies still have a highly protected

agricultural sector and low FDI inflows also

show the same trend (Table 4).

FDI in IndiaIn this section a detailed analysis of the FDI

in India is presented on the basis of approvals,

actual flows, country and sector-wise break-

ups, state-wise break-ups and also on the

components of FDI. Considerable interest is

being shown in measures that might promote

private foreign investment and allow it to

make a greater contribution to development

(Bhalla, 1994); this fact is being proved herein the analysis.

Table2:InwardFDIS

tockasaPercentageofGros

sDomesticProduct,byHostRegionandEconomy,1985-2005

(...

con

td)

Region/Economy

1985

1995

1996

19

97

1998

1999

2000

2001

2002

2003

2004

2005

South

-EastAsia

13.46

22.63

24.62

27.47

47.22

45.98

45.42

44.63

43.65

43.84

44.16

43.20

Indo

nesia

6.71

10.17

11.77

14.57

32.68

20.95

16.50

10.63

4.11

4.96

7.05

7.65

Malaysia

23.68

32.34

35.72

42.28

62.44

61.86

58.40

38.60

39.45

39.70

37.19

36.52

Philippines

8.46

8.21

8.89

10.23

14.28

14.98

16.87

14.95

15.68

14.87

14.92

14.37

Sing

apore

60.03

78.21

81.41

78.39

105.83

124.23

121.67

139.95

153.20

157.55

156.19

158.57

Thailand

5.14

10.53

10.83

8.84

22.78

25.37

24.37

28.79

30.09

33.96

32.95

33.50

Vietnam

30.55

34.48

40.82

49.48

57.51

63.39

66.07

70.43

74.31

70.44

63.54

61.17

South-EastEuropeandtheCommon-

0.00

1.31

1.97

3.24

5.40

8.64

15.87

19.49

22.15

24.45

23.80

21.22

wealthofIndependentStates(CIS)

Source:W

orldInvestmentReport2006.


11/24



,1985-2005

Regio

n

1985

1990

1991

1995

1997

1998

1999

2000

20

01

2002

2003

2

004

2005

Asia5421.41

22642.36

24154.07

7991

8.01

105772.63

95249.46

111285.32

147992.76

112044.89

96124.85

110136.74

156622.32

1995

53.64

%ofW

orld

9.35

11.23

1

5.60

23.48

21.60

13.38

10.12

10.50

13.46

15.56

19.74

22.04

21.78

WestAsia

681.56

455.69

214

5.33

2495.21

4246.19

3535.75

1799.49

3518.27

7219.71

6018.77

12313.53

18580.96

34460.75

%ofA

sia

12.57

2.01

8.88

3.12

4.01

3.71

1.62

2.38

6.44

6.26

11.18

11.86

17.27

South,Eastand

4739.85

22186.67

2200

8.74

77422.80

101526.44

91713.71

109485.82

144474.49

104825.18

90106.08

97823.21

1380

41.36

165092.89

South-EastAsia

%ofA

sia

87.43

97.99

9

1.12

96.88

95.99

96.29

98.38

97.62

93.56

93.74

88.82

88.14

82.73

EastAsia

2248.30

8791.07

794

4.11

46551.57

61848.97

65548.87

77478.44

116275.40

78828.59

67350.24

72173.98

1050

74.18

118192.28

%ofA

sia

41.47

38.83

3

2.89

58.25

58.47

68.82

69.62

78.57

70.35

70.07

65.53

67.09

59.23

China

1956.00

3487.11

436

6.34

37520.53

45257.04

45462.75

40318.71

40714.81

46877.59

52742.86

53505.00

606

30.00

72406.00

%of

Asia

36.08

15.40

1

8.08

46.95

42.79

47.73

36.23

27.51

41.84

54.87

48.58

38.71

36.28

HongKong,

267.22

3275.07

102

0.86

6213.36

11368.15

14764.95

24578.09

61924.06

23776.53

9681.88

13623.58

340

31.70

35897.46

China

Korea,

217.90

759.20

113

0.30

1246.70

2641.10

5067.50

9630.70

8650.60

3866.30

3042.80

3891.90

77

26.90

7198.00

Repu

blicof

Taiwan

342.00

1330.00

127

1.00

1559.00

2248.00

222.00

2926.00

4928.00

4109.00

1445.00

453.00

18

98.00

1625.00

Provinceof

China

South

Asia

173.13

574.75

42

4.35

2717.18

5370.56

3888.99

3241.83

4658.30

6414.86

6982.13

5729.27

73

01.26

9765.05

%ofA

sia

3.19

2.54

1.76

3.40

5.08

4.08

2.91

3.15

5.73

7.26

5.20

4.66

4.89

Bangladesh

6.66

3.24

1.39

1.90

575.25

576.46

309.12

578.70

354.50

328.30

350.20

4

60.40

692.00

India

106.09

236.69

7

5.00

2151.00

3619.00

2633.00

2168.00

3585.00

5472.00

5627.00

4585.00

54

74.00

6598.00

%of

Asia

1.96

1.05

0.31

2.69

3.42

2.76

1.95

2.42

4.88

5.85

4.16

3.50

3.31

Pakistan

47.44

278.33

27

1.92

492.10

711.00

506.00

532.00

309.00

383.00

823.00

534.00

1118.00

2183.00

SriLa

nka

24.40

43.35

6

7.00

65.00

433.00

150.00

201.00

172.95

171.79

196.50

228.72

2

33.00

272.00

South-EastAsia

2318.42

12820.85

1364

0.28

28154.05

34306.91

22275.84

28765.55

23540.79

19581.72

15773.71

19919.96

256

65.93

37135.56

%ofA

sia

42.76

56.62

5

6.47

35.23

32.43

23.39

25.85

15.91

17.48

16.41

18.09

16.39

18.61

(Con

td...)

(inUS$mn)


12/24

1989-1991

2002-2004

Sector/Industry

Developed

Developing

World

Develope

d

Developing

South

-East

World

Countries

Economies

Countries

Economies

EuropeandCIS

Primary

9103

3,340

12,443

36,398

16,328

4,909

57,635

Ag

riculture,hunting,forestry

6

608

603

131

2,341

132

2,604

andfisheries

Mining,quarryingandpertroleum

9,072

2,732

11,804

36,493

13,987

4,777

55,257

Un

specifiedprimary

37

37

226

0

226

Manufacturing

47,693

16,453

64,147

93,337

84,957

6648

184,943

Food,beveragesandtobacco

4,846

2,459

7,304

10,874

5,737

794

17,405

Textiles,clothingandleather

2,113

248

2,361

2,236

1,334

46

3,616

Woodandwoodproducts

2,006

239

2,245

425

298

396

268

Publishing,printingand

rep

roductionofrecordedmedia

870

870

2,531

140

1

2,672

Co

ke,petroleumproductsand

nuclearfuel

997

309

687

6,189

70

532

6,651

Ch

emicalsandchemicalproducts

10,097

2,214

12,311

17,275

6,716

230

24,221

Table4:Estim

atedWorldInwardFDIFlows,bySectorandIndustry,1

989-1991and2002-2004

(Con

td...)

(inmn$)



,1985-2005

Region

1985

1990

1991

1995

1997

1998

1999

2000

20

01

2002

2003

2

004

2005

Indonesia

310.00

1092.00

1482

.00

4346.00

4678.00

241.00

1865.00

4550.00

2978.43

145.09

596.92

18

96.00

5260.00

Malaysia

694.71

2611.00

4043

.00

5815.00

6323.00

2714.00

3895.26

3787.63

553.95

3203.42

2473.16

46

24.21

3967.12

Philip

pines

105.00

550.00

556

.00

1459.00

1249.00

1752.00

1247.00

2240.00

195.00

1542.00

491.00

6

88.00

1132.00

Singa

pore

1046.75

5574.75

4887

.09

11535.31

13752.67

7313.87

16577.91

16484.49

15648.87

7338.08

10376.37

148

20.11

20082.73

%ofAsia

19.31

24.62

20

.23

14.43

13.00

7.68

14.90

11.14

13.97

7.63

9.42

9.46

10.06

Thailand

159.99

2575.00

2049

.00

2070.00

3882.00

7492.00

6091.00

3350.00

3886.00

947.00

1952.00

14

14.00

3687.48

(...

con

td)

Source:WorldInvestm

entReport2006(percentagesestimated).

(inUS$mn)


13/24

1989-1991

2002-2004

Sector/Industry

Developed

Developing

World

Develope

d

Developing

South

-East

World

Countries

Econo

mies

Countries

Economies

EuropeandCIS

Rubb

erandplasticproducts

933

31

964

2,744

247

3

2,994

No

n-metallicmineralproducts

1,298

2

25

1,523

3,672

611

88

3

5,166

Metalsandmetalproducts

3,972

1,2

75

5,247

15,145

1,653

77

0

17,567

Machineryandequipment

4,851

2,9

29

7,779

9,970

6,153

60

7

16,730

Ele

ctricalandelectronicequipment

3,530

9

67

4,498

940

4,319

2

3

5,282

Precisioninstruments

837

837

1,233

64

2

6

1,144

Motorvehiclesandothertransportequipment

3,571

3

01

3,873

5,910

2,130

0

8,040

Ot

hermanufacturing

2,336

8

01

3,137

5,464

1,374

8

6,846

Un

specifiedsecondary

7,431

4,4

55

11,886

12,045

54,252

2,33

1

68,628

Services

83,807

11,3

02

94,909

336,513

92,418

7,24

3

436,174

Ele

ctricity,gasandwater

827

1,1

83

2,011

21,397

5,970

4

3

27,411

Co

nstruction

481

5

62

1,043

3,119

2,103

27

8

5,500

Trade

16,474

2,4

79

18,953

31,299

16,346

2,58

5

50,229

Ho

telsandrestaurants

3,596

9

19

4,515

1,249

1,715

13

1

3,095

Transport,storageandcommunications

1,681

1,1

93

2,874

30,710

11,303

82

2

42,835

Fin

ance

30,353

2,4

08

32,761

112,664

19,663

95

2

133,279

Bu

sinessactivities

17,288

1,5

04

18,792

90,462

26,143

1,63

7

118,242

Pu

blicadministrationanddefence

2,317

2,317

3,103

16

1

3,264

Education

7

4

11

3

40

3

46

He

althandsocialservices

67

23

90

296

212

2

2

62

Co

mmunity,socialandpersonalservice

activities

2,274

2,283

1,318

4,295

1

9

5,632

Otherservices

7,328

5

47

7,875

34,534

2,250

3

36,787

Un

specifiedtertiary

913

4

72

1,385

6,952

2,378

58

7

9,917

Priva

tebuyingandsellingofproperty

114

114

1,402

1

1

1,414

Unsp

ecified

8,086

3,8

39

11,925

17,618

9,189

73

8

27,545

Table4:Estim

atedWorldInwardFDIFlows,bySectorandIndustry,1

989-1991and2002-2004

(...

con

td)

Source:UNCTAD.

(inmn$)


14/24

As in all colonial countries there was a widespread animosity towards foreign capital in

India (Chandra, 1991). Since 1980s, foreign capital was welcomed into hitherto closed areas

and its inflow multiplied manifold. Outstanding FDI as estimated by RBI, in Indias commercial

and industrial sector increased at a very slow pace from Rs. 387 cr in 1955 to Rs. 973 cr in

1975 falling marginally to Rs. 933 cr in 1980 (Chandra, 1991). The series of adjustments in

industrial policy in the 1980s and opening the doors wider for FDI undoubtedly helped somescaling up of the inflow of foreign private capital from the insignificant Rs. 10 cr per annum in

1970s to annual average of Rs. 100 cr in the first half of the1980s and about

Rs. 200 cr per annum in the second half (Mehta, 1991).

It is realized that FDI has proved to be an even more powerful channel for the transfer of

knowledge and export capability, and India should not lag behind other Asian countries in reaping

the benefits of FDI, especially for the infrastructure and exports (Economic Survey,1993-94). As a

result of open policy relating to FDI, foreign interest in Indian economy got stimulated.

Approvals vs. Actual Inflows

Table 5 depicts the detailed account of FDI actual inflow against the amount that was approved.

It can be observed that there is a large gap between the two, mainly attributed to the procedural

delays at the initial phase of liberalization. This gap seems to have faded in the later phases

Amount in Rs. cr Amount in US$ mn

Year (Jan.-Dec.) FDI Approvals FDI Inflows FDI Approvals FDI Inflows

1991 (Aug.-Dec.) 505 353 206 144

1992 3,818 691 1459 264

1993 8,862 1,862 2,891 608

1994 8,955 3,112 2,855 992

1995 30,882 6,485 9,835 2,065

1996 30,886 8,752 8,981 2,545

1997 50,389 12,990 14,048 3,621

1998 27,590 13,269 6,985 3,359

1999 25,140 10,167 5,986 2,421

2000 17,237 12,354 4,009 2,873

2001 20,940 16,778 4,653 3,728

2002 11,058 18,196 2,304 3,791

2003 5,416 11,617 1,178 2,526

2004 8,741 17,266 1,900 3,755

2005 7,900 19,299 1,775 4,360

2006 (Jan.-Oct.) 10,646 36,092 2,343 7,930

Total 2,68,965 1,89,283 71,407 44,983

Table 5: Year-Wise FDI Approvals and Inflows(Net of ADRs/GDRs) (from August 1991 to October 2006)

Note: a. FDI approvals data from the month of October 2004 are not being maintained by RBI, Mumbai.

b. FDI inflow includes FIPB/SIA route, RBIs automatic route, amount on account of acquisition of existing shares by foreign investors,

RBIs NRI Schemes, stock swapped and advance amount pending allotment of shares.

Source: SIA, DIPP, Ministry of Commerce and Industry.


15/24

where, foreign investment

is being attracted to a large extent

by removing all the administrative

hurdles and also providing a

conducive economic environment

within the country.

Country-Wise Analysis

The analysis of FDI on the basis

of country of origin shows

interesting results. Most of the

developed economies are seen to

express their interest in investing

in India. Tax-Haven Mauritius isthe favorite route of most

investors. As seen in Table 6, this

country alone contributes to one-

third of all our inflows. The US

is the second highest contributor

having a share of around 12%.

All the other economies are

meager contributors with

Singapore and Switzerland

contributing only to the extent

of 3% and 1% respectively.

This shows that there are large

number of small investments

flowing in rather than small

number of large investments.

Figure 1 is a clear indication ofthe above statement. The policy

initiatives have to be taken up to

boost large investors into the

country.

Sector-Wise Analysis

The FDI in India is majorly

concentrated in the electrical

equipment industry, which

Table6:Statem

entonCountry-Wise/Year-W

iseFDIInflows(fromAugust1991toSeptember2006)

Source:SIANewsletter,DIPP,MinistryofCommerceandIndustry.

S.No.

Country

1991-2002

2003

2004

2005

2006

C

umulativeTotal

(Aug.-Dec.)

(Jan.-Dec.)

(Jan.-Dec.)

(Jan.-Dec.)

(Jan.-Sep.)

(inR

s.)

(inUS$)

1.

Mauritius

308,226.14

25,859.33

46,162.14

94,078.28

146,632.48

620,958.35

14,328.84

2.

USA

131,648.83

19,040.00

29,791.68

20,700.41

24,179.08

225,359.99

5,444.55

3.

Japan

69,320.44

4,343.86

5,337.44

7,449.55

4,648.43

91,099.71

2,162.78

4.

TheNetherlands

45,002.48

11,618.83

22,779.26

5,277.35

4,747.90

89,425.81

2,090.81

5.

UK

54,922.31

8,628.97

6,585.36

9,578.08

8,187.49

87,902.20

2,092.50

6.

Germany

39,842.10

3,624.98

7,274.88

3,683.13

12,529.23

66,954.33

1,619.73

7.

Singapore

21,277.30

1,680.46

2,855.01

14,168.96

26,224.54

66,206.28

1,531.92

8.

France

24,307.05

1,642.51

5,289.30

1,288.29

2,011.09

34,538.24

817.07

9.

Korea(South)

23,699.89

1,128.62

1,227.14

2,943.09

1,728.19

30,726.94

786.67

10.

Switzerland

14,120.56

4,289.59

3,137.05

3,689.39

2,704.36

27,940.96

673.06

11.

AcquisitionofExistingShares(fr

om1996to1999)

72,780.18

0

0

0

0

72,780.18

1,848.86

12.

AdvanceofInflows(from1999to2004)

55,030.92

18,807.56

24,851.48

0

0

98,689.96

2,178.72

13.

StockSwapped

840

1,725.00

0

283.71

0

2,848.71

61.23

14.

RBIsNRISchemes

84,269.48

0

0

0

0

84,269.48

2,509.86

GrandTotal

1,050,091.58

116,171.70

172,665.21

192,990.87

283,743.30

1,815,662.66

43,284.10

(AmountinRs.mn)


16/24

contributes to around 14% of the total inflows. This is followed by the financial and non-

financial services contributing around 10%. As seen in Table 7, most of the inflows among the

top 10 industries are towards the service sector. Food-processing industry and pharmaceutical

industry would be the industries where FDI would largely be flowing in future.

Figure 2 gives a summary of the FDI inflows for 2006 reflecting the trend in the country

towards more and more service sectors opening up for foreign investment and also proving to

be one of the favorite destinations of investors.

Figure 1: Share of Top Five Countries in FDI Inflows

(Cumulative from April 2006 to September 2006)

17%

2%3%

9%

11% 58%

Mauritius

Singapore

USA

UK

The Netherlands

Others

Source: Reserve Bank of India.

Figure 2: Sector-Wise Distribution of Top Five FDI Inflows

(Cumulative from April 2006 to September 2006)

30%

3%6%

9% 18%

Services Sector

Electrical Equipments

(incl. S/W and Elec.)

Telecommunications

Transportation Industry

Fuels (Power and OilRefinery)

Others

34%

Source: Reserve Bank of India.

State-Wise Analysis

Maharashtra has been a major FDI destination among all the states in India. Table 8 depictsthe top five states in India, which are attracting most of the investment. Naturally, these states


17/24

Source:

SIANewsle

tter,D

IPP

,Ministryo

fCommercean

dIndustry.

Table7:StatementonSector-Wise/Year-W

iseFDIInflows(fromAugust1991toSeptember2006)

S.No.

Sector

1991-2002

2003

2004

2005

2006

CumulativeTotal

(Aug.-Dec.)

(Jan.-Dec.)

(Jan.-Dec.)

(Jan

.-Dec.)

(Jan.-Sep.)

(inR

s.)

(inUS$)

1.

ElectricalEquipments(including

110,908.65

13,550.09

39,666.61

45

,938.44

63,042.10

273,105.89

6,271.88

ComputerSoftwareandElectronics)

2.

ServicesSector(Financialand

65,938.62

13,903.59

11,455.83

31

,445.14

74,849.74

197,592.92

4,599.77

Non-Financial)

3.

Telecommunications

98,994.43

7,272.59

6,087.84

9

,639.13

39,722.26

161,716.24

3,776.12

4.

TransportationIndustry

98,763.48

15,133.84

8,063.68

9

,659.22

13,403.52

145,023.74

3,436.37

5.

Fuels(PowerandOilRefinery)

89,762.37

7,418.51

7,159.79

2

,765.05

8,972.42

116,078.14

2,719.70

6.

Chemicals(otherthanFertilizers)

53,993.62

2,849.05

8,677.14

9

,044.68

15,627.48

90,191.97

2,237.58

7.

FoodProcessingIndustries

38,228.38

3,076.28

3,690.18

1

,782.91

1,745.95

48,523.72

1,211.19

8.

DrugsandPharmaceuticals

16,893.94

2,793.28

15,711.08

5

,107.25

4,802.86

45,308.40

1,054.97

9.

MetallurgicalIndustries

10,590.68

1,454.52

8,583.79

6

,321.99

6,324.84

33,275.81

765.8

10.

CementandGypsumProducts

12,166.66

440.4

7.3

19

,698.17

960.04

33,272.56

767.47

11.

MiscellaneousIndustries

130,010.60

14,568.58

13,400.28

17

,567.60

34,961.65

210,508.70

4,933.60

12.

AcquisitionofExistingShares

72,780.18

0

0

0

0

72,780.18

1,848.86

(from1996to1999)

13.

AdvanceofInflows(from1999

to2004)

55,030.92

18,807.56

24,851.48

0

0

98,689.96

2,178.72

14.

StockSwapped

840

1,725.00

0

283.71

0

2,848.71

61.23

15.

RBIsNRISchemes

84,269.48

0

0

0

0

84,269.48

2,509.86

GrandTotal

1,050,091.75

116,172.60

172,665.19

192

,990.87

283,743.30

1,815,663.70

43,284.12

(AmountinRs.mn)


18/24Source: RBI online database on the Indian economy.

Table 9: Components of FDI in India

Year Direct Foreign Investment Equity Reinvested Earnings Other Capital

1990-91 97 NA NA NA

1991-92 129 NA NA NA

1992-93 315 NA NA NA

1993-94 586 NA NA NA

1994-95 1,314 NA NA NA

1995-96 2,144 NA NA NA

1996-97 2,821 NA NA NA

1997-98 3,557 NA NA NA1998-99 2,462 NA NA NA

1999-00 2,155 NA NA NA

2000-01 4,029 2,399 1,352 280

2001-02 6,130 4,096 1,644 390

2002-03 5,035 2,825 1,832 438

2003-04 4,322 2,229 1,460 633

2004-05 5,652 3,779 1,904 369

2005-06 7,751 5,820 1,676 256

(in US$ mn)

Table 8: Share of Top Five States Attracting FDI Approvals(January 1991 to March 2004)

RankName

No. of FDI Approvals Amount of FDIPercentage with Total

of the State Total Tech. FinancialRs. US$

FDI Approvedin cr in bn

1 Maharashtra 4,816 1,308 3,508 51,114.68 13.18 17.48

2 Delhi 2,638 304 2,334 35,250.74 9.78 12.06

3 Tamil Nadu 2,607 613 1,994 25,071.77 6.52 8.58

4 Karnataka 2,467 494 1,973 24,138.44 6.15 8.26

5 Gujarat 1,204 556 648 18,837.30 4.81 6.44

Source: Economic Survey 2003-04.

also happen to be among the most industrialized states in our country. So industrialization

leads to further industrialization. Maharashtra attracts most of the manufacturing FDI, whereas

Delhi and Karnataka attracts the FDI in service sector.

Components of FDI

As can be observed from Table 9, most of the investment flows are fresh equity investments.

India does not have full convertibility on capital account as of now; this brings most of the

earnings reinvested in the economy. The other capital which includes the remittance towards

recouping the losses of branches/subsidiaries, etc. forms a minor part of the total inflow.


19/24

Source:

Est

ima

ted

.

Table10:DescriptiveStatistics

Sum

Mean

M

inimum

Maximum

Std.

Dev.

Variance

Skewness

Expo

rts

(US$mn

)

574

534

.00

38302

.27

18266

.00

85206

.00

18781

.39

352740651

.00

1.2

5

Impo

rts

(US$mn

)

760

234

.00

50682

.27

21064

.00

118908

.00

25006

.84

625342117

.00

1.4

4

GDP

(Rs.cr)

15614

111

.00

1040940

.73

692871

.00

1529408

.00

269817

.23

72801337406

.36

0.3

2

FDI(US$mn

)

40

748

.00

2716

.53

97

.00

6130

.00

2021

.32

4085729

.70

0.2

3

Analysis of Relation Between FDI, Exports, Imports

and GDP in India (1985-2005)

Undoubtedly, the role of FDI in the Indian economy has

considerably increased. The most important factors for this

change are liberalization of regulatory framework and privatization

programs since 1991. In other words, India adopted open door

policy with regard to FDI since late 1980s. The theoretical support

for FDI is that it will contribute to increasing exports and higher

growth of GDP. Flow of investment in the short run may also

increase imports; however, if this situation continues in the long

run it may have a detrimental impact on the growth and national

income if increase in exports does not match with the increase

in imports.

It would be interesting to analyze the impact of FDI on exportsand GDP. With this intention, simple regression technique has

been used to capture the impact of FDI on exports, imports and

GDP. FDI has been used as an independent variable whereas

exports, imports and GDP are used as dependent variables.

As depicted in Table 10, the imports have a higher mean,

standard deviation and also a higher skewness and the exports

are lower than the imports showing the steady trade deficit that

was existing in Indias foreign trade.The growth of FDI in India was very low in the initial years

of liberalization. However, in the later years with the relaxation

of processes for entry and fast track clearances and widespread

opening of FDI both in terms of cap and sectors showed a marked

improvement in the inflows. The average does not seem

impressive due to the above fact.

To analyze the regression results it is important to see the

impact of the most sought after FDI in the economy. As can beseen in Table 11, the coefficient of determination (R2) between

the FDI and exports is very high and also significant. The

interpretation can be that on an average, US$1 mn inflow of

FDI in the economy results in around US$7.8 mn exports in the

economy. The variation in exports due to changes in FDI can be

explained to the extent of 72%. All the estimated coefficients

are statistically significant and have an acceptable standard error.

The coefficient explaining variation in exports is significant and

positive indicating that the FDI has in fact promoted exportsduring the period of study.


20/24

In case of imports, as expected, the coefficient has a positive value and is statistically

significant showing that there is an increase in imports along with an increase in the exports

with every flow of FDI in the economy. The results of regression show that with every million

US$ increase in the FDI, there is an increase of imports to the extent of US$10 mn. This

indicates two things: (i) imports are increasing with FDI and (ii) increase in imports are higher

than increase in exports with every dollar flow of FDI in the country. However, the coefficient

of determination is only 67% indicating that there are other factors besides the FDI whichexplain the changes in imports in the Indian economy over the period of study.

The main aim of all the economies to attract FDI is to see that the economic growth takes

place and the people in the economy are better off than before. The closest indicator of

economic growth is the GDP of the economy. So by analyzing the impact of FDI on GDP, we

explain whether the objective has been achieved or not. As can be seen in the table, the

regression results show a positive and statistically significant relationship between GDP and

FDI in the Indian economy during the period of study. There is an increase in the GDP variable

due to FDI inflows. The coefficient of determination is also very high (84%) indicating thatmost of the changes in GDP can be explained by FDI in the economy. Thus, it can be said that

the purpose for which the FDI is attracted in the economy is being served to a very large extent.

However, to get a true picture, a comparative study across economies indicating the contribution

of FDI in the economic growth of these economies would be more justified. But, this is

beyond the scope of this paper.

Conclusion

FDI has contributed in the process of growth in the world economy in general and the developing

world in particular. From the study it is clear that FDI has positive impact on exports, imports

and has greatly contributed to GDP. Foreign investment flows are growing more rapidly than

world GDP and trade, implying increasing integration of world economy through capital and

technology.

New sectors such as retail, banking, insurance, drugs and pharmaceutical industry which

are either thrown open or planned to be open for private and foreign investment, are the hopes

for the Indian economy. To quote the recent trends, FDI equity inflows during April 2006 to

November 2006 were $7.2 bn, which is the highest ever for equity capital since economic

liberalization. The higher inflows as well as the new credit rating reflected growing investorconfidence in India. According to A T Kearneys FDI confidence index, Indias rank as a FDI

Source: Estimated.

Table 11: Regression Analysis

Constant B Coefficient Std. Error t sig. R R2

Exports 16848.889 7.897 1.358 5.816 0.000 0.850 0.722

Imports 23059.220 10.168 1.954 5.203 0.000 0.822 0.676

GDP 707486.899 122.75 14.547 8.438 0.000 0.920 0.846


21/24

investment destination has improved from No. 15 in 2003 to No. 2 in 2006. According to the

leading financial firm J P Morgan, the return on equity on investments made in India is the

highest in Asia at 18%. Services sector has become the top sector in attracting FDI during

April-November 2006. The importance of FDI in the countrys economy is in terms of not only

generating economic activities and jobs, but equally in facilitating transfer of technology and

managerial capabilities, which helps enhance Indias global competitiveness (Times NewsNetwork, 2007).

Unlike China, India has not been able to attract substantial FDI; Indian manufacturing

should be able to take advantage of foreign investment as a transmission belt for advanced

technology. Unless India makes serious efforts in the direction of improving labor relations,

financial sector and infrastructural facilities accompanied by long-term policy certainty, it is

difficult to attract FDI continuously like other leading Asian nations. Therefore, Indias attitude

and political intent towards foreign investment and technology has to be made clear in order

to obtain huge foreign investment flows.

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Impact of FDI in India

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