Macroeconomic determinants
Macroeconomic DeterminantsOf Foreign Direct Investment in
India
Introduction:
FDI has been one of the most debated and significant factor in
the economic development of the last 3 decades. In Asia, foreign
direct investment (FDI) has increased significantly over the past
two decades. However, this FDI 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 per cent of the FDI inflows to the all- Asian
countries. The BRIC report [1] states that India is going to be one
of the most popular destinations for FDI from across the globe.
However, the preliminary question still remains whether this inflow
of FDI is going to lead to any growth in our domestic economy and
exports, if yes how much and will it be significant enough to drive
further FDI inside the economy. Increases in FDI inflows exceeded
the growth in nominal value of World GDP and international trade,
which expanded by around 3.5 percent and 7 percent in 2006
respectively (World Investment Report, 2005).
Foreign direct investment can be defined as an investment which
involves establishing a long term relationship with the country
where the investment takes place and it reflects an intention of
lasting interest and control by the country which has made the
investment. By making a FDI, the home countries investor expects to
get management control and also a major say in the decision making
process of the host countries company. The inflow that takes place
through FDI is not a one time flow, depending on the interests and
extent of profitability and performance the home country may decide
to reinvest/expand. The FDI can come from individuals as well as
companies. (World Investment Report, 1997).
The components included to account the FDI values from country
to country.
Theoretical Background:
There are various the theoretical foundations that discuss the
FDI:(i) 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 Rural Prebish, such
investment should flow into the branches of production in which it
is most needed (Hunt, 1987).[1]
www2.goldmansachs.com/insight/research/reports/99.pdf
(ii) Over Lapping Generations Model:The overlapping Generations
(OG) model is a long run growth model and it gives a different
perspective of the effects of foreign direct investment on the home
and host countries. The summary of the finding is that this model
gives is that when a country takes up the foreign investment it
makes the future generations of the country which imports
capital(host country) better off and the future generations of the
country that Exports capital(home country) worse-off (Bhalla,
1994).
When a foreign investment takes place anywhere in the world, the
rate of interest increases in the home country and it tends to fall
in the host country. The capital stock of the previous generation
determines the wage levels of the present generation. It therefore
directly affects the savings made by the present and future
generations. The wage rate is assumed not to change. Therefore,
since foreign investment reduces the rate of interest in the host
country, according to the O.G. Model the present generation suffers
the effect of low interest rates. The rate of Interest increase in
the home country which exports capital, therefore, the present
generation of that country enjoys the fruits of high interest rates
(Roy, 1979).
(iii) 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), internalization (I)
advantages of a countrys firms differentiates along the countrys
course of economic development (Dunning, 1994), 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; it must be more convenient the firm to
manage its advantages internally (I) rather than trade them through
the market. This appeared to be a very useful paradigm in
explaining the different characteristics that needs to be fulfilled
for a firm to be called a Multi-national and also helped in
developing further empirical workings on this topic. (Soci,
2002)
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 of foreign
capital has been emphasized in literature on economic development,
for instance, the gap models (Hunt, 1988) and the
Kindleberger-Hymer Approach to foreign direct investment.
It is Abba Learner who discussed at length about of 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, 1960) can
also be mentioned in this respect. However, the question of the
possible adverse effects of foreign capital on the levels of
domestic saving was first raised by Trygve Haavelmo (Haavelno,
1960). Following Haavelmo, many evinced interested 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, 1986).
One of the earliest studies on the relationship between foreign
direct investment and growth is that of Papanak (Papanek, 1973).
Among country specific studies, the work of Gustav Ranis and Chi
Shive on Taiwan (Ranis, 1985) is very exhaustive. In 1970, it is
Rober Aliber who raised many theoretical issues like whether FDI is
a currency area or customs areas phenomena (Aliber, 1970). W.B.
Reddaways analysis (Reddaway, 1968) of influence of FDI on BOP is a
land mark study in the literature on FDI. A more general theory
originally propounded in a thesis at MIT by Stephen Hymer is 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 is
made by Charles, P. Kindleberger (Kindleberger, 1958, 1968). His
influence on subsequent works is profound that his analysis and
approach to FDI along with that of Stephen Hymer is well known as
Kindleberger Hymer Approach.
However, there are some region specific studies too, which helps
in understanding what are the FDI drivers at a very disaggregate
level and has useful implications at policy making level (Na,
2006). Others talk about development of successful FDI strategies
at national level (Musila, 2006). Some simplistic papers look at
just the trends of FDI in various countries- what they expect to
measure is the general perspectives without exploring in detail
what are the implications of these investments on the national
growth and other parameters. There are studies pertaining to firm
level analysis of the determinants (Pantelidis, 2005), and the
paper deals with specific determinants of US FDI in India
(Balasundram, 1998)
Objectives of the Present Study:
The main objective of this paper is to analyze the major
determinants of outward and inward Foreign Direct Investment (FDI)
in India, such as income, exchange rate, technology, human capital
and openness of the economy and determine which is more significant
than others.
Hypothesis:
It is known through the theories specified above that the any
asset of the country keeps evolving over a period of time along
with its development and changes in the external environment
especially the economic policies. The firms in the economy also
keep reacting to the above changes and make suitable strategies of
growth. The FDI which flows in and out of the economy therefore
must be a reaction and dependent on these country specific
parameters. Thus this paper tries to evaluate the hypothesis that
the FDI is a function of the factors specific to a country such as
Income, exchange rate, technology, human capital and openness in
the economy with specific reference to Indian economy.
Period of Study:
A time-series data is taken for analysis, from 1980 to 2005 for
analysis. The model tries to identify the main determinants of FDI
in Indian economy.
Sources of Data:
Varied sources are taken for various parameters. Primarily the
data on FDI, exports, imports, interest rates, Exchange rates and
GDP is taken from Reserve Bank of India (RBI) online database of
Indian Economy and other annual publications on Indian economy by
Reserve Bank of India. The data for Human capital and the
technology is taken from the World Bank Reports and UNESCOs report
of various years.
Methodology:
The model function is given below in the following form:
FDI = F(Y; I; ER; T; HC; O; D) + + + + + + + + - + + + +Where,
FDI = Outward/inward flows of FDI.Y = Real GDP.I = Interest rate.ER
= Real Effective Exchange Rate (REER) Index.T = Technology
variable. This variable is reflected through the number of patents
issued in the home country.HC = Human capital variable. It is
approximated by number of education students.O = Openness of the
economy. This variable is reflected by the level of exports plus
imports.D = Dummy variable for measuring the impact of
liberalization process started in 1991 in the Indian economy: it
takes the value 0 for the years between 1980 and 1991 and the value
1 for the years between 1991 and 2005.
The signs given below the variables indicate the expected
relation (negative or positive) between the independent variables
and FDI outflows. The linear regression analysis is done using the
OLS for the period between 1980 and 2005.
The Model: Variables used and Explanations:The dependent
variable in the model is FDI of the given economy for the period
specified above.There are several independent variables in the
model namely Income, exchange rate, technology, human capital and
openness in the economy. A brief explanation as to why these are
considered as variables in the model and why they are regarded as
independent variables supposed to have an influence on FDI is
explained below.
1. Income: The first independent variable is GDP of the economy.
It is generally observed that the pattern of International Trade in
terms of the composition and direction changes with development of
an economy. There are changes observed in the internal sectors also
such as increasing share of industry and service sectors, the
capital intensity of production increases, demand patterns move
towards the consumption of differentiated products and markets
grow. The latter improves the realization of economies of scale
through specialization, the introduction of new technology and
greater volumes of output (Chenery et al., 1986).
As the income of the nation increases there is always a
possibility that firms start accumulating advantages which are
owner specific or are resource specific. Thus the OLI advantages as
mentioned earlier gets created which attracts more FDI within the
country as makes the domestic economy more inclined towards the
external market (Dunning, 1993). Thus, it can be said that as in
case of trade the investment pattern also undergoes a change with
the development of the economy. Thus, in this model, the GDP of the
nation is taken as a variable to measure the development and
structural changes of the economy over the period of study. It is
expected as shown in the model that there is a positive
relationship expected between the FDI and GDP indicating that as
the nation advances towards more development, the FDI inflows and
outflows increase.2. Exchange Rate: The appreciation and
depreciation of currency does have an impact on the price of
exports and imports making their comparative position and
competitiveness in international markets fluctuate sometimes
towards advantage to the home country and sometimes disadvantage.
It was argued by (Aliber, 1970) that firms which come from
countries that have strong currency are able to financially support
their foreign direct investments in a much better manner than those
firms which come from countries that have a inherently weak
currency. The link between the interest rate and exchange rate also
makes it more beneficial for a firm to go in for a FDI as the
currency appreciates. Similarly the reduction in competitiveness of
exports also may make the country look for better ways of entering
international business. Thus, there appears to be a sure link
between the exchange rate and outward FDI, and the relation is
expected to be positive for outflows and negative for inflows as
shown in the model. The real effective exchange rate index of the
Indian economy which is calculated as a weighted average of top
currency basket is taken as a representative of the variable
exchange rate 3. Interest Rate: Foreign operations require
significant commitment in capital, especially if they are
undertaken in capital intensive sectors where production is
characterized by extensive economies of scale, as the case is for
most FDI. If there is abundant capital in the home country, that
may become one of the primary reasons for going in for foreign
investment by large firms. Such firms would have adequate financial
means and they would also be able to access the capital markets
much more efficiently than small capital starved firms. The
opportunity cost of capital for such firms also comes down due to
relatively low interest rate which occurs as a result of capital
abundance. These firms are willing to take up the risks and
uncertainties associated with foreign investments because the
returns on such investments also being high (Krykilis, 2003).
Therefore, it is expected that if the interest rate of the home
country is low, then there would be high propensity for FDI inflows
and vice versa (Clegg, 1987; Prugel, 1981; Lall, 1980; Grubaugh,
1987). 4. Technology: This factor is widely recognized as one
factor that does have a sure and great impact on FDI, infact the
FDI sometimes may be the cause for increasing technological
progress as it also gets influenced by the level of technological
progress of the economy. Every firm across different countries has
its own ability to organize and produce technological inputs. This
depends on several parameters like the legal systems and patent
processes, the availability of technological inputs and the
requisite skills to handle it, the market structure, the policy of
the government related to education and the incentives that these
policies offer to encourage education, scientific research, etc. ,
(Krykilis, 2003). The ability of firms to generate technological
inputs of a country is approximated by the number of patents
issued. Thus higher the patents issued higher would be the outward
FDI propensity of the country. Researchers across the globe have
proved theoretically as well as empirically that technological
capability is positively related with FDI (Lall, 1980; Prugel,
1981; Grubaugh, 1987; Clegg, 1987; Cantwell, 1981; Cantwell, 1987;
Pearce, 1989; Kogut and Chang, 1991; Dunning, 1993, Krykilis,
2003). 5. Human Capital: Some researchers proved that the skill
intensive sectors are more prone to attract the foreign direct
investment than the rest (Juhl, 1979; Lall, 1980; Prugel, 1981;
Clegg, 1987). The availability of the human resources is one factor
that plays an important role in determining the FDI; however the
sheer number does not affect the inflow as the quality of the human
resource does. The size of labour force may be instrumental in
determining the price of the factor, as low labour cost may
increase the cost competitiveness of the firm. But in an skill
intensive industry, the quality of the labour force determined by
the number of people who are educated and the number of science and
technology professionals that exist matters. The human capital
supply varies depends largely on the education systems and also the
government policies. The number of students both male and female
who are taking up higher level of education is taken as a variable
to measure this factor, as the data of R&D professionals in the
Indian economy is not available for continuous years for the period
of study. Many researchers showed that the higher the number of
graduates, the higher would be the expected skill content in the
employment. Thus, there is a positive relation that is suggested
between human capital and FDI (Krykilis, 2003). 6. The Openness of
the Economy: The FDI activities of the firms are constrained when
there is protectionist policy followed; therefore these activities
are encouraged when the country embarks on the path of
liberalization. The reasons for this change are many. The capital
controls are relaxed which makes the flow of capital and funds for
investment between countries easier and faster (Scaperlanda and
Mauer, 1973; Scaperlanda and Balough, 1983; Scaperlanda, 1992). The
management skills of marketing products internationally,
innovations, technology advancements and knowledge of external
operations become unrestricted in an economy that is export
oriented. The firms of an open economy may choose retaliate against
the competition that FDI has brought in by different modes and may
also involve themselves in the home markets of the import producing
countries. (Krykilis, 2003). The exports plus imports level of a
country is taken as a variable to represent this degree of
economies openness. 7. Dummy Variable: Dummy variable is taken for
measuring the impact of liberalization process started in 1991 in
the Indian economy: it takes the value 0 for the years between 1980
and 1991 and the value 1 for the years between 1991 and 2005.
Data Analysis and Results:FDI is seen to increase as a
percentage of the Gross Domestic Product of most of the economies
indicating the movement towards more openness in the world economy.
On the whole, FDI forms around 22 percent of the GDP of all the
Economies of the world. As shown in Table I, The developed
countries are seen to be moving closely with the World average.
Whereas, the developing economies are seen to be improving very
fast and keeping the share 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, as seen in
the Table, the economy of Hong Kong overwhelmingly attracting
Foreign Investments followed by Singapore and Vietnam in East Asia.
India is slowly picking up the speed as far as FDI is concerned; it
started with a meager 0.33 percent and is presently at around 6
percent. Among the developing economies, all the continents are
faring equally as far as this parameter is concerned.
Foreign capital is treated as a resource gap-filling factor in
the context of capital scarcity in 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 of the most preferred arguments for FDI
is that it brings in a complete package of capital, technology and
market access. It may also result in the manufacturing sectors
earning a potential competitive advantage (Edward, 1992). In those
manufacturing sectors which enjoy comparative advantage, the inflow
of FDI would give rise to economies of scale and higher
productivity and create linkage effects (Edward, 1992) with FDI,
profitability and outward remittance of profits and dividends move
in close tandem with the performance of the economy and the balance
of payments (Siow, 1993).
Coming to the scenario in Asia, few economies in this region are
attracting heavy inflows and others remain a low player. As can be
seen in the Table II, Asia contributes around one-fifth of the
worlds FDI. South, East and South-east Asia contributing almost
four-fifth of the total inflows destined in this region. However,
there is a huge skewness in favour 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 a deprived region in entire Asia, with
India contributing only around 3 percent 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.
Take in Table I
12
Table IInward FDI Stock as a Percentage of Gross Domestic
Product, by Host Region and Economy, 1985 - 2005
Region/economy198519951996199719981999200020012002200320042005
World6.959.4010.2611.7614.0115.9518.3519.8020.9222.5023.3022.67
Developed
economies6.448.929.6710.3612.4713.5416.2317.5719.3621.0922.0521.40
Europe9.9713.1313.8515.2219.0720.6426.3828.4431.8333.8934.9433.48
United
Kingdom14.0617.6219.2219.0723.7326.3630.5035.4033.4433.7233.3237.10
North
America5.498.318.749.219.9111.4614.0214.4514.0714.3414.5114.56
United
States4.417.297.708.268.9510.3712.8713.3412.8912.8813.0313.02
Other developed
countries2.342.913.533.453.934.353.944.406.027.298.157.32
Developing
economies8.9312.2213.2817.5320.5725.9126.2628.0726.7427.7727.9327.00
Africa10.4516.7216.4317.5619.3226.9825.9926.5629.8230.4029.9428.20
Latin America and the
Caribbean9.2611.0512.6815.4718.6624.2925.8431.8233.9936.7837.6436.65
Asia and
Oceania8.3112.1513.1418.6721.9526.5626.5126.3723.3023.8823.8823.15
Asia8.2612.1213.1118.6621.9526.5726.5126.3723.2923.8823.8923.15
West
Asia11.328.027.808.318.998.888.529.669.2211.8211.3811.88
East
Asia8.2412.2613.1923.2725.4734.0433.9833.3427.6428.0928.3426.99
China2.0414.4415.6917.1418.5118.7817.8917.2817.0416.1214.8814.29
Hong Kong,
China75.2450.0751.52143.59136.21252.29275.44257.53210.25243.39275.21299.88
Korea, Democratic People's Republic
of..13.366.579.8010.319.989.839.458.589.1710.0910.70
Korea, Republic
of2.241.832.062.745.566.477.328.588.117.948.247.97
South Asia0.912.543.274.144.704.534.664.785.455.626.046.23
India0.331.542.112.543.333.433.774.205.005.185.685.84
Pakistan3.017.279.3612.7411.7910.189.788.258.298.488.778.78
Sri
Lanka8.849.9510.1612.2412.7314.099.809.7110.4410.7211.3110.41
South-East
Asia13.4622.6324.6227.4747.2245.9845.4244.6343.6543.8444.1643.20
Indonesia6.7110.1711.7714.5732.6820.9516.5010.634.114.967.057.65
Malaysia23.6832.3435.7242.2862.4461.8658.4038.6039.4539.7037.1936.52
Philippines8.468.218.8910.2314.2814.9816.8714.9515.6814.8714.9214.37
Singapore60.0378.2181.4178.39105.83124.23121.67139.95153.20157.55156.19158.57
Thailand5.1410.5310.838.8422.7825.3724.3728.7930.0933.9632.9533.50
Viet
Nam30.5534.4840.8249.4857.5163.3966.0770.4374.3170.4463.5461.17
South-East Europe and the Commonwealth of Independent States
(CIS)0.001.311.973.245.408.6415.8719.4922.1524.4523.8021.22
Source: World Investment Report 2006
Take in Table II
Table IIInward FDI Flows, by Host Region and Economy, 1985 -
2005 (in US $ Million)
19851990199119951999200020012002200320042005
Asia5421.4122642.3624154.0779918.01111285.32147992.76112044.8996124.85110136.74156622.32199553.64
% of
World9.3511.2315.6023.4810.1210.5013.4615.5619.7422.0421.78
West
Asia681.56455.692145.332495.211799.493518.277219.716018.7712313.5318580.9634460.75
% of Asia12.572.018.883.121.622.386.446.2611.1811.8617.27
South, East and South-east
Asia4739.8522186.6722008.7477422.80109485.82144474.49104825.1890106.0897823.21138041.36165092.89
% of
Asia87.4397.9991.1296.8898.3897.6293.5693.7488.8288.1482.73
East
Asia2248.308791.077944.1146551.5777478.44116275.4078828.5967350.2472173.98105074.18118192.28
% of
Asia41.4738.8332.8958.2569.6278.5770.3570.0765.5367.0959.23
China1956.003487.114366.3437520.5340318.7140714.8146877.5952742.8653505.0060630.0072406.00
% of
Asia36.0815.4018.0846.9536.2327.5141.8454.8748.5838.7136.28
Hong Kong,
China-267.223275.071020.866213.3624578.0961924.0623776.539681.8813623.5834031.7035897.46
Korea, Republic
of217.90759.201130.301246.709630.708650.603866.303042.803891.907726.907198.00
Taiwan Province of
China342.001330.001271.001559.002926.004928.004109.001445.00453.001898.001625.00
South
Asia173.13574.75424.352717.183241.834658.306414.866982.135729.277301.269765.05
% of Asia3.192.541.763.402.913.155.737.265.204.664.89
Bangladesh-6.663.241.391.90309.12578.70354.50328.30350.20460.40692.00
India106.09236.6975.002151.002168.003585.005472.005627.004585.005474.006598.00
% of Asia1.961.050.312.691.952.424.885.854.163.503.31
Pakistan47.44278.33271.92492.10532.00309.00383.00823.00534.001118.002183.00
Sri
Lanka24.4043.3567.0065.00201.00172.95171.79196.50228.72233.00272.00
South-East
Asia2318.4212820.8513640.2828154.0528765.5523540.7919581.7215773.7119919.9625665.9337135.56
% of
Asia42.7656.6256.4735.2325.8515.9117.4816.4118.0916.3918.61
Indonesia310.001092.001482.004346.00-1865.00-4550.00-2978.43145.09-596.921896.005260.00
Malaysia694.712611.004043.005815.003895.263787.63553.953203.422473.164624.213967.12
Philippines105.00550.00556.001459.001247.002240.00195.001542.00491.00688.001132.00
Singapore1046.755574.754887.0911535.3116577.9116484.4915648.877338.0810376.3714820.1120082.73
% of
Asia19.3124.6220.2314.4314.9011.1413.977.639.429.4610.06
Thailand159.992575.002049.002070.006091.003350.003886.00947.001952.001414.003687.48
Source: World Investment Report 2006 (percentages estimated)
Since the data used is time series and for over two and half
decades, it was checked for its stationarity and there was no
stationarity observed.
The descriptive statistics of the data set is given in Table
III, as it can be observed that in India the Inflows of foreign
direct investment in all years have been much higher than the
outflows, this aspect owes itself to the liberalization policies
which were put in place quite late in the economy only after 1991
when they were initiated. The process of integrating the domestic
economy with the global economy though has advanced over a period;
it still remains partial in many cases.
Take in Table III
Table IIIDescriptive Statistics
MeanStd. Deviation
FDI In9731.208112784.42419
FDI Out57.878820.20889
GDP361970.5485152980.33055
ER80.431916.60447
I10.28851.89696
P1774.1538434.72876
T6630645.19232982656.33152
O58961.346242828.08604
Correlations between variables is estimated and shown in the
Table IV, the correlation coefficients are estimated using the Karl
Pearsons method. As can be observed that GDP shows a high level of
correlation with most of the variables whereas, the Exchange rate
shows almost a negative and weak relationship with most of the
variables in the model as is the case of Interest rates and
technological development. Human capital development and openness
of the economy is closely and positively related which is a good
sign of economic progress.
Take in Table IV
Table IVCorrelationsFDIIFDIOGDPREERINTPATENTSEDNXMD
FDII1.000-.969-.033-.716-.010.946.978.638
Y.969.9631.000-.213-.625.012.944.983.708
ER-.033-.175-.2131.000-.381.272-.257-.123-.637
I-.716-.613-.625-.3811.000-.233-.558-.629-.105
T-.010-.052.012.272-.2331.000-.065-.051-.308
HC.946.977.944-.257-.558-.0651.000.921.724
O.978.951.983-.123-.629-.051.9211.000.687
D.638.683.708-.637-.105-.308.724.6871.000
The regression results are shown in Table V, here the FDI
inflows are taken as dependent variable and other variables as
independent. It can be observed that the constant in the model is
significant. It can be seen that all variables except the exchange
rate, interest rate and technological factor is seen to have values
as expected in the model. However, this factor also shows no
significance in the model. Though the overall goodness of fit is
very high and the Durbin-Watson statistics does not show any signs
of autocorrelation among the data variables, surprisingly the
exchange rate is not related to the inflows of FDI in the Indian
scenario possibly because it was controlled for a major part of
years in the period of study. The process of liberalization also
shows a positive and significant impact on the FDI flows, as seen
by the results of dummy variable, which should be a factor that the
policy makers should note and go ahead with further fastening of
the pace of relaxations of norms for FDI inflows in the
economy.
Thus, it can be said that that Indian FDI inflows are mainly
dependent on the levels of openness and sectors of available for
inflows rather than major macro economic considerations such as
exchange rates and technological aspects. The domestic cost
structures and the availability of human capital in abundance and
openness in the economy seems to be a very significant factor to
impact the FDI inflows as can be seen in the model.
Take in Table V
Table VOLS estimates of all variables in the model 1980-2005
VariablesFDI Int-statistics
Y.009.740
ER117.8984.758
I-787.356-4.294
T-.159-.279
HC.0027.855
O.1233.346
D2388.2002.827
Constant-13680.044-2.941
R2.996
F statistic671.048
DW1.768
The FDI outflow of the Indian economy has been largely
restricted by policies almost till the turn of the millennium. The
regression results of FDI outflows as a dependent variable can be
seen in Table VI. As can be observed that none of the variables are
significant except the human capital and most of the variables are
showing reverse correlations as against the expected signs in the
model. Thus, the model can be discarded as not relevant in Indian
context as Indian liberalization of FDI outflows has still a long
way to go. This need to be tested further when the liberalization
process takes off in true sense and in a complete manner.
Take in Table VITable VIOLS estimates of all variables in the
model 1980-2005
VariablesFDI Outt-statistics
Y3.73E-005.775
ER.060.608
I.003.004
T-.002-.676
HC4.46E-0065.484
O 4.74E-005.323
D-1.602-.474
Constant10.733.576
R2.976
F statistic102.471
DW1.584
Conclusions:
The exchange rate and economic growth seem to show least impact
on the FDI inflows in Indian economy and human capital and openness
of the economy plays a significant role as far as attracting
inflows are concerned. These results are exactly opposite to the
findings related to developed countries FDI determinants, where
exchange rate and GDP play a more positive and important role
(Krykilis, 2003). This shows that the liberalization process of the
economy needs to be fastened and more and more sectors should be
thrown open for inward flows. Similarly the model does not work for
outward flows as in many cases the flow is restricted by policy.
Thus, it can be said that human capital plays a significant role,
which can be related to the abundance of human resources at a
competitive cost. Finally, national endowment resulting in natural
competitiveness does determine the FDI of Indian economy.
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Further Readings:
i) Buckley, P.J. and Casson, M. (1976), the Future of the
Multinational Enterprise, Macmillan, London. ii) Buckley, P.J. and
Casson, M. (1985), the Economic Theory of the Multinational
Enterprise, Macmillan, London.iii) Caves, R.E. (1971), Industrial
corporations: the industrial economics of foreign investment,
Economica, Vol. 38, pp. 1-27.
Dr. G Bharathi KamathAssistant ProfessorEconomics
AreaIBS-Mangalore,Near Railway over
bridge,PadilMangalore-575007phone:0824-2275838/848 Email:
[email protected]
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