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Impact of Foreign Investments on Economic Growth of India

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DOI: 10.5281/zenodo.2109614

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 Volume-03 ISSN: 2455-3085 (Online)
Issue-12 RESEARCH REVIEW International Journal of Multidisciplinary
December -2018 www.rrjournals.com [UGC Listed Journal]

Impact of Foreign Investments on Economic Growth of India

*1 2
Tilak Raj & Ashima Pahwa
1
Professor, Dept. of Commerce, MDU, Rohtak (India)
2
Research Scholar, Dept of Commerce, MDU, Rohtak (India)

ARTICLE DETAILS ABSTRACT

Article History Foreign Direct Investment is an investment made by firms or individual of one country in the
Published Online: 10 December 2018 business of another country. Foreign investments have a positive impact on the
development of the Indian Economy. Inflows of FDI strengthen the trade network of a
Keywords country at global level and also provide financial assistance to that country. FDI helps in
Foreign Investment, financial assistance, reducing the balance of payment (BOP) deficit. This paper is to analyze the impact of
trade network and external economies
foreign investments inflows on the economic growth of India. Secondary data has been
* collected from the period 2002-03 to 2016-17 to achieve the objective. By applying
Corresponding Author
regression technique and with regression model it is found that FDI has a significant impact
Email: [email protected]
on the growth of an economy.

1. Introduction GDP. GDP is an independent variable. Gross Domestic

Foreign investment means the flow of capital from one product calculated at market price and at factor cost. GDP at
country to another by investing in the assets or buying shares market price is the sum of gross value added of all resident
of companies of another country. Investments can be done by producers at market prices plus taxes less subsidies on
individual, companies and corporations but mostly it is done by imports.
companies as to increase its market share at global level.
2. Role of FDI In Economic Growth
Foreign investments can be done in two ways: directly and  Provides capital
indirectly. Foreign Direct Investments are the investments  Removes negative BOP
done physically or by opening plants, purchasing machines;  It brings technology and management skills
equipments etc. Foreign companies invest directly in the fast  Promotes increased employment
growing Indian private companies to get the benefit of cheaper  Create competitive environment
wages and changing environment of India. Foreign Indirect
Investments involves investments in stakes of foreign 3. Literature Review
companies by different investors like corporations, private Louzi,B.M & Abadi, A. (2011). In their paper “The
investors and financial institutions. But these investments are Impact of Foreign Direct Investment on Economic Growth in
less favorable because domestic companies sell the Jordan” they talked about FDI- led Growth in Jordan. Their
investments, sometimes within few days of purchase. study is based on time series data from 1990 to 2009. FDI
plays vital role in the economic growth of the country. They
FDI flows records the data of cross border transactions also explained the situation during 1991-2009 that FDI at
related to direct investments during the given period of time global level increased at 25% whereas developing countries as
(usually a quarter or a year). FDI inflows means investment group showed increase at the rate of 22% at constant prices.
made by foreigners in the domestic companies and FDI The first major inflows of FDI started after liberalization in FDI
outflows are the investments made in the external economies. policies. Many studies done earlier showed that FDI and
FDI inflows trigger the economic growth of a country. In view of Growth had a positive relation but with their study they
the fact that many developing countries are experiencing lack concluded one more thing that FDI was not the sole and
of monetary funds, low level of technology and skills. FDI is an independent factor that influenced the growth of the country.
essential factor for sustainable development and poverty Net Attitude revealed the investment climate of Jordan. The
alleviation. Expansion of economy with FDI flows is a good suggested that appropriate measures should be taken by the
indicator of economic growth as it increases the job govt. such as transparency in trade policies, flexible labour
opportunities and hence creates employment. United Nations markets, tariff structure etc.
Conference on Trade and Development (UNCTAD) said in its
report that India notches to rank no. 9 in terms of FDI received Anitha,R. (2012). In his paper “Foreign Direct Investment
in 2016, at the time global FDI fells. and Economic Growth in India” he talked about the role of FDI
in the development of developing and underdeveloped
Gross domestic product (GDP) is the primary indicator countries. FDI in such countries bridges the gap between
which explains the health of the country. GDP shows the total available financial resources and required financial resources.
value of all the goods and services produced during the period. In his paper he analyzed the trends of FDI inflows in the
It doesn’t matter whether the companies are of own country or country from 2010 to 2015. He mentioned the reasons for the
foreign-owned companies, if they are within country’s poor performance of India in attracting FDI inflows such as
boundaries govt. count the production as a part of its own political instability, poor infrastructure, tariff laws, labour laws

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Volume-03, Issue-12, December -2018 RESEARCH REVIEW International Journal of Multidisciplinary

etc. in his study he concluded that global share of FDI in India Rahaman, A. & Chakraborty, S. (2015). They had done
is very less as compared to other developing countries even empirical research in Bangladesh to analyze the relationship
after increased in the flow of FDI. To improve this situation between foreign direct investments and gross domestic
govt. has to adopt innovative policies and good corporate product. FDI is an important medium for accelerating economic
governance practices to attract more & more foreign capital. growth. FDI had positive impact on the economic growth as it
results in HR development, advance technologies came into
Singh, J., et.al. (2012). In their paper “Role of Foreign own country. They used secondary data for analyzing the trend
Direct Investment in India: An Analytical Study” they showed in GDP. The upward Trend was shown during the period 1987-
that FDI played a major role in attracting International 2011. They concluded that inflows of foreign investments in the
Economic Integration in every economy. Main sectors where Bangladesh (as a developing country) is very low and to
investments were flowing more were: real estate & business, improve this situation govt. had to take steps i.e. develop skills
insurance sector etc. The objective of the study was to know of labours, develop infrastructure and remove power shortage
the amount of foreign investments required for growth and problem, investment friendly framework etc.
analyzing its trend. There are two routes of FDI inflows i.e.
automatic route (liberalized route) and government route (or Sharma, M. & Singh, S. (2016). In their paper they
approval route). They also talked about the main determinants examined the major features of FDI and its impact on Indian
of FDI (a) in host country were policy framework, international economy in pre and post liberalization period. They explained
agreements, trade policies, rules regarding entry & operations the attitude of Indian govt. towards foreign investments from
etc. (b) economic determinants such as market size, market 1950 in 4 phases. Attitude changed a lot from restrictive to
structure, labour, technology etc. in their study they found that open door policy when FERA replaced FEMA. Indian trade
saving rate is very low and route of investment inflows were turned to new heights after the Second World War. They also
FDI & FIIs both. The highest amount 6878 billion dollars in talked about economic factors that affect the growth and
India came from Mauritius. They concluded that India should development of Indian Economy such as GDP, Currency,
welcome foreign investments as it is favorable for Indian Stock Market, and Foreign Exchange Reserve etc. After 1990,
Economy and also helped govt. in achieving their goals such India realized the power and importance of foreign investments
as favourable BOP, removal of poverty, economic as it was a source of external private finance. They suggested
development etc. the main sectors where there were opportunities of foreign
investments like service sectors, construction & development
Malhotra,B. (2014). In her paper she analyzed the
sector etc.
challenges facing by India in positioning itself favourably at
global level in context of FDI and also examined the impact of
4. Objectives of the study
FDI on the Indian Economy. FDI acts as a bridge to fulfill the
gap between investment and savings of the country. She  To study the trend pattern of Foreign Direct
suggested that for equal growth govt. has to invest equally in Investment from 2002-03 to 2016-17.
the rural areas as invested in urban areas. Govt. should  To know the impact of FDI on the economic growth of
liberalized FDI policy to make markets more investment India.
friendly.
5. Research Methodology
Bedi, P., & Kharbanda, E. (2014). in their paper they  Period of the study: To achieve the objective, data
analyzed the status of FDI in India and find the issues & for the period of 2002 to 2017 have been taken.
problems why India was a less attractive destination of FDI  Analysis Method: The collected data are analyzed
inflows even after India had low labour cost, talented & skilled with the help of Linear Regression.
workforce. Paper is based on secondary data. Major negative  Sources of Information: This study is based on
aspects considered while doing business were corruption, Secondary data; the data is collected from various
inadequate supply of infrastructure, complicated tax structure sources: the Handbook of statistics of Indian
and restrictive labour regulations. They suggested that this was economy, publications, journals and internet.
the right time rather it’s been too late for India to make reforms
in their policies and make them liberalized so that foreign 6. Analysis and Interpretation
investment inflows increased as compared to other developing
countries. Only then India can think of increase in FDIs in
coming years.

Table 1. Depicts FDI inflows and its impact on GDP

FDI Growth GDP GDP FDI as
FDI (in rupee
YEAR Rate (in rupee Growth percentage of
billions)
( in % ) billions) Rate ( in % ) GDP
2002-03 200.98 - 25306.63 - 0.794
2003-04 628.42 212.68 28379.00 12.14 2.214
2004-05 580.57 7.61 32422.09 14.25 1.791
2005-06 687.82 18.47 36933.69 13.92 1.862
2006-07 667.91 2.89 42947.06 16.28 1.555

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Volume-03, Issue-12, December -2018 RESEARCH REVIEW International Journal of Multidisciplinary

2007-08 1743.95 161.11 49870.90 16.12 3.497

2008-09 350.61 79.9 56300.63 12.89 0.623
2009-10 2399.51 584.38 64778.28 15.06 3.704
2010-11 1934.82 19.37 77841.16 20.17 2.486
2011-12 1887.38 2.45 87363.29 12.23 2.160
2012-13 2546.53 34.92 99440.13 13.82 2.561
2013-14 1596.5 37.31 112335.22 12.97 1.421
2014-15 4490.72 181.29 124451.28 10.79 3.608
2015-16 2085.79 53.55 136820.35 9.94 1.524
2016-17 2893.94 38.75 151837.05 10.98 1.906
Source: Handbook of Statistics on the Indian Economy

Table1 reveals that the FDI inflows in India have 9.94% in 2015-16 and then increased in 2016-17 with rate
increased at a higher rate from Rs. 200.98 billions in the year 10.98%. The FDI as percentage of GDP was recorded
2002-03 to Rs. 2893.94 billions in the year 2016-17. The between 0.794% in the year 2002-03, which has increased to
highest growth rate was recorded in the year 2009-10 i.e. 3.704% in the year 2009-10. It shows a continuous rise in FDI
584.38% and lower in the year 2011-12 i.e. 2.45%. Increased as percentage of GDP but after financial year 2009-10 it takes
in growth rate of GDP has been recorded between 12.14% in a drop & reached at 1.421% in 2013-14. The FDI as
the year 2003-04 and 20.17% in the year 2010-11. GDP starts percentage of GDP in year 2016-17 was 1.906%.
falling reach to its minimum growth rate (since 2002) with

Graph-1

Fig. representing the FDI and GDP growth rate

 Regression analysis of FDI and GDP

 The impact of foreign investment inflows on the GDP over the financial years from 2002 to 2017.
 Independent variable: Foreign Direct Investments (FDI)
 Dependent variable: Gross Domestic Product (GDP)

Table 2.
Descriptive Statistics
Mean Std. Deviation N
Gross Domestic Product (in billion 75135.1173 41696.94111 15
rupees)
1646.3633 1170.68826 15
Foreign Direct Investments (in billion
rupees)

Table 3.
Pearson Correlation Coefficients
Gross Domestic Foreign Direct
Product (in billion Investments (in billion
rupees) rupees)
Gross Domestic Product 1.000 .782
Pearson Correlation
(in billion rupees)

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Volume-03, Issue-12, December -2018 RESEARCH REVIEW International Journal of Multidisciplinary

Foreign Direct Investments (in .782 1.000

billion rupees)
Gross Domestic Product (in .----- .000
billion rupees)
Sig. (1-tailed)
Foreign Direct Investments (in .000 .-----
billion rupees)

Table 4.
Model Summaryb
Model R R Adjusted R Std. Error of the Change Statistics Durbin-
Square Square Estimate R Square F Change df1 df2 Sig. F Change Watson
Change
1 .782a .611 .581 26986.06357 .611 20.424 1 13 .001 1.955
a. Predictors: (Constant), Foreign Direct Investments (in billion rupees)
b. Dependent Variable: Gross Domestic Product (in billion rupees)

Table 3 & 4 indicates the strength of relationship between Investments) and outcome (GDP). In the model summary
2
the model and the dependent variable i.e. GDP. Table 3 shows (Table 4) value of R tells about how much variation in GDP is
2
the correlation between independent variable (i.e. FDI) and due to the variation in Foreign Investments. Value of R =
dependent variable (i.e. GDP). Value of R = 0.782 which 0.611 in Table 4. indicates that 61.1% variation in GDP is due
indicates high degree of correlation between predictor (Foreign to the variation in the foreign investments.

Table 5.
ANOVAa
Model Sum of Squares Df Mean Square F Sig.
14873669423.494 1 14873669423.494 20.424 .001b
Regression

9467219150.748 13 728247626.981
1 Residual

24340888574.242 14
Total

a. Dependent Variable: Gross Domestic Product (in billion rupees)

b. Predictors: (Constant), Foreign Direct Investments (in billion rupees)

Table 5 represents the ANOVA analysis in which value of F = 20.424 which are at significant 5% level of significance as p
value is 0.001 (<0.05)

Table 6.
Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) 29296.715 12305.577 -- 2.381 .033
1 Foreign Direct Investments (in 27.842 6.161 .782 4.519 .001
billion rupees)
a. Dependent Variable: Gross Domestic Product (in billion rupees)

Table 6 of coefficients executes of b-values

(unstandardized coeffiecients) that explains the individual The standardized beta values in the table 6 indicate the
contribution of independent variable to the model. The positive volume of change in standard deviation outcome due to one
value shows the positive relationship between the predictor standard deviation (S.D) change in predictor. This value
and outcome variable and vice- versa. indicates that as FDI increases by one S.D (1170.68826), GDP
increases by 0.782 std. deviation. This is true only if the effects
When we replace the B values in equation we find the of other factors held constant.
model as:
GDP = b0 + b1 (foreign investments) Testing of hypothesis
= 29296.715 + 27.842 H0: There is no significant impact of FDI on
economic growth.
The value of b1 = 27.842 indicates that as FDI increases The P-value related to FDI is less than 0.05. So, Null
by one unit, GDP increases by 27.842 units. Therefore, every hypothesis is rejected and concluded that there is significant
additional unit of FDI is associated with an extra 27.842 unit’s impact of FDI on the GDP of Indian Economy.
increment in GDP.

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Volume-03, Issue-12, December -2018 RESEARCH REVIEW International Journal of Multidisciplinary

Trend pattern of FDI 2011-12 1887.38 939.09

Table 7. Trend Analysis of FDI 2012-13 2546.53 1267.06
Trend Analysis 2013-14 1596.5 794.36
YEAR FDI Base Year
2014-15 4490.72 2234.41
2002-03 (in %)
2002-2003 200.98 100 2015-16 2085.79 1037.81

2003-04 628.42 312.68 2016-17 2893.94 1439.91

2004-05 580.57 288.87

Table 7. shows the trend of foreign investment inflows
2005-06 687.82 342.23
over the period of time by taking 2002-03 as base year. Above
2006-07 667.91 332.33
table shows trend percentage of foreign investments goes on
2007-08 1743.95 867.72
increasing with more or less % and reached 867.72%. But in
2008-09 350.61 174.45
2008-09 drop in investment was seen. Thereafter India again
2009-10 2399.51 1193.90
enjoys investments made in their country. Trend percentage of
2010-11 1934.82 962.69 investments in financial year 2016-17 was 1439.91%.

Fig. shows trend of foreign direct investments during 2002-17

7. Conclusion
Above analysis shows, foreign direct investment has a aspects such as improvement of infrastructure, liberalized FDI
significant impact on the economic growth of the country and policy, political stability etc. In this regard IFC (International
also FDI has a major contribution in it. Each country tries to Finance Corporation), the investment arm of the World Bank
bring more and more FDI in their country which will later bring Group, is planning to invest about US$ 6 billion through 2022
economic growth of the country. For attracting more and more in several sustainable and renewable energy programmes in
inflows of foreign investment govt. has to work on some India.

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