Relationship Between Foreign Direct Investments and Economic Growth of India: Empirical Evidence from India

Abstract

Since 1991 Foreign Direct Investment(FDI) has been continuously contributing towards the economic development of Indian economy. On the basis of various literature review it can be said that foreign direct investment contributes positively towards growth domestic product(GDP) growth and employment generation in the developing countries like India. Therefore, the present study is conducted to analyse the role of the foreign direct investment on the economic growth of India for the sample period 1992 to 2019.In the study the economic growth is represented by the variables like gross domestic product(GDP) and employment generation in Indian for the time period 1992-2019. For the study various econometric tools like Augmented Dickey-Fuller(ADF) unit root test, Granger Causality test, Ordenary Least Square(OLS) regression method, Johansen Cointegration test and Error Correction test are applied. The ADF unit root test reflects that all three variables i.e GDP, FDP, and employment are stationary at 1^st difference I(1). The result of Granger causality test between Foreign Direct Investment and Gross Domestic Product shows   unidirectional causality from economic growth to foreign direct investment in India. But The Granger Causality test shows no casual relationship between foreign direct investment and employment generation. The OLS regression analysis shows a positive relationship between FDI and GDP in India with R square value 0.886177. But the relationship between FDI and number of employment generation is not significant as it has the P value 0.3559. Johansen Cointrgration Test shows a long run positive relation among GDP, FDI and employment generation as both trace statistic and eigen value statistic reject the null hypothesis at 5% level of significance. The result of Error Correction Model(ECM) shows that  the speed of adjustment among the variables toward long run  is 25.5 percent per year. As FDI has positive impact on the economic growth in India so the government of India should take various policies to attract the foreign investors to India and Increase the FDI inflows.