A study on the interrelationship between foreign direct investment (FDI) and economic growth of India

Foreign direct investment has been the essence of major discussions in the world of finance in the globalization era. FDI is often preferred over other forms of capital flows by the policy makers as it is considered to be of a more stable nature and also it does not form a part of the host country's external debt stock. The relationships between FDI and a country's economic growth are still a subject of great debate. In this context, the present study intends to explore the relationship between foreign direct investment and economic growth of India during the Pre and post-Liberalization period from 1971 to 2009. Johansen's cointegration approach that there are two cointegrating vectors that indicate long term interaction and relationship among the variables viz., FDI, GDP, Export, Employment, Exchange rate. The empirical estimates clearly suggest the Causation runs from GDP to FDI which supports the hypothesis of GDP -driven FDI for India i.e., the economic growth of India has a significant impact on investment decisions of multinational firms. The study concludes that FDI per se will not assure growth but restricted and well regulated FDI will benefit the national economy in the long run.