Kiel Working Papers, Kiel Institute for World Economics
No 1272:
Economic Reforms, Foreign Direct Investment and its Economic Effects in India
Chandana Chakraborty and Peter Nunnenkamp
Abstract: Foreign direct investment (FDI) has boomed in post-reform
India. Moreover, the composition and type of FDI has changed considerably
since India has opened up to world markets. This has fuelled high
expectations that FDI may serve as a catalyst to higher economic growth. We
assess the growth implications of FDI in India by subjecting
industry-specific FDI and output data to Granger causality tests within a
panel cointegration framework. It turns out that the growth effects of FDI
vary widely across sectors. FDI stocks and output are mutually reinforcing
in the manufacturing sector. In sharp contrast, any causal relationship is
absent in the primary sector. Most strikingly, we find only transitory
effects of FDI on output in the services sector, which attracted the bulk
of FDI in the post-reform era. These differences in the FDI-growth
relationship suggest that FDI is unlikely to work wonders in India if only
remaining regulations were relaxed and still more industries opened up to
FDI.
Keywords: foreign direct investment, economic reform, growth effects, India, cointegration, causality; (follow links to similar papers)
JEL-Codes: F21,; F23,; O53; (follow links to similar papers)
43 pages, March 2006
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