A bivariate causality link between foreign direct investment and economic growth. Evidence from India

• DOI: https://doi.org/10.1108/14770021311312502
• Published date: 22 March 2013
• Pages: 68-79
• Date: 22 March 2013
• Author: Manpreet Kaur,Surendra S. Yadav,Vinayshil Gautam
• Subject Matter: Economics

A bivariate causality link

between foreign direct

investment and economic growth

Evidence from India

Manpreet Kaur, Surendra S. Yadav and Vinayshil Gautam

Department of Management Studies, Indian Institute of Technology,

Delhi, Delhi, India

Abstract

Purpose – The purpose of this paper is to examine the causal relationship between economic growth

and foreign direct investment (FDI) in context of India.

Design/methodology/approach – Using Toda-Yamamoto granger causality technique, authors

tried to examine the causal link between GDP per capita (proxy for economic growth) and FDI. The

data is tested for stationarity using Augmented Dickey-Fuller test and Phillips Peron test. Authors

also examined the co integration properties using Johansen test to identify long run relationship

between the two variables.

Findings – It was found that GDP per capita and FDI are integrated in long run. There also exist a

bidirectional between FDI and growth in post liberalization period, i.e. post 1991. There is also

evidence of FDI led growth in the pre-liberalization period, i.e. pre 1991.

Research limitations/implications – There are many factors which contribute to FDI and GDP per

capita. A comprehensive study can be done to explore other determinants of FDI and GDP per capita.

Practical implications – The findings reveal that economic growth measured by GDP per capita

has become one of the important determinants of FDI after liberalization. The evidence of FDI led

growth in both the periods signifies that policy makers should ensure a minimum level of economic

growth to maintain India as an attractive destination for FDI. The policy should lay emphasis on

business facilitation measures like improving the conditions for doing business in India, expanding the

role of investment promotion agencies (IPAs) and providing single window for foreign investment.

Originality/value – There exists cross-sectional studies onexamining relationship between FDI and

growth. However, there is a need to have country level study to identify FDI and growth nexus as it is

sensitive to country specific factors which are unobservable in time series analysis of group of countries.

Keywords Foreign directinvestment, Gross domestic productper capita, Causality, Unit root,

Liberalization,India, Direct investment

Paper type Research paper

I. Introduction

India is the largest democracy and fourth largest economy in terms of gross domestic

product (GDP) (based on purchasing power parity) in the world. With its consistent

growth performance and highly skilled manpower, India provides enormous

opportunities for foreign investments. Since the beginning of economic reforms in

1991, major reforms have been initiated in the field of investment, trade and financial

sector. Accordingly, India also liberalized its highly regulated foreign direct investment

(FDI) policy. Enactment of Competition Act, Foreign Exchange Management Act

(FEMA), amendments in Intellectual Property Right (IPR) laws and many other reforms

made India an attractive destination for international investors.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1477-0024.htm

Journal of International Trade Law

and Policy

Vol. 12 No. 1, 2013

pp. 68-79

qEmerald Group Publishing Limited

1477-0024

DOI 10.1108/14770021311312502

JITLP

12,1

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