Significance Of Foreign Direct Investment In Economic Growth

This project report researches the heading of causal connection between foreign direct investment (FDI) and economic development in BRICS (Brazil, Russia, India, China, South Africa) nations utilizing direct relapse system from BRICS nations, shows bidirectional short run causal connection among GDP and FDI.

Introduction

There are few issues which have for quite some time been discussed and have not been settled in the writing of improvement financial aspects. The causal connection of foreign direct investment (FDI) is one of them. There are discoveries which bolster that FDI tends to advance financial development. FDI gives fundamental fixings that are important for financial development. By giving new generation process, methods, administrative aptitudes and new assortments of capital merchandise, the exchange of new strategies and innovation overflow from the auxiliaries of multinational to residential firms and improves monetary development. Then again, others found that FDI take after financial development. Financial development initially gives vital and favorable financial elements for FDI to assume a positive part for monetary improvement. For instance, the overflow impact of innovation exchange however FDI can just be effective if the retaining limit of host nations is created.

Also, an examination of causal connection among FDI and monetary development has key and approach suggestions for creating developing economies (LDC). FDI and monetary development might be connected in one the three conceivable ways: (1) Causal connection may keep running from monetary development to FDI. In the event that the causal connection keeps running from monetary development to FDI, it implies that monetary development is an essential for drawing in and retaining FDI. In such a case, the strategy suggestion is that creating developing economies (LDC) must lay accentuation on financial development as opposed to following FDI. (2) Causal connection may keep running from FDI to monetary development. On the off chance that there is unidirectional causality from FDI to financial development.

Literature review

Hansen and Rand (2006) found strong causal link from FDI to GDP for a group 31 developing countries during 1970-2000. Bloomstrom, Lipsey and Zejan (1996) found evidence that FDI Granger caused economic growth. However, FDI’s positive contribution is conditional. According to them, FDI is growth enhancing if the country is sufficiently reach measured in term of high per capita income. DeMello (1997) found that FDI had significantly positive effect on economic growth for the countries with high income.

Borensztein, Gregorio, and Lee (1998) found that FDI contributed economic growth to countries when the labor force has attained certain level of educational standard. Carkovic and Levine (2002) examined the effect of FDI on economic growth and concluded that FDI had no impact on long term economic growth. They argued that the lack of positive impact of FDI on economic growth is not conditional upon human capital, level of economic development or openness of the economy.

Caves (1996) found bidirectional relationship. FDI and economic growth are positively interdependent. Large economic growth provides high profit opportunities attracting higher domestic and foreign direct investments. On the other hand, FDI through its spillover effect have direct positive economic growth of the host countries. Chowdhry and Mavrotas (2006) found relationship of bidirectional causality between FDI and economic growth. Kholdy and Sohrabian (2005) found no causal link between FDI and economic growth. Thus, the empirical evidence on the causal link between FDI and economic growth is mixed that deserves fresh enquiry into this issue.

Methodology

GDP and FDI data are annual and current dollar. They are obtained from IFM and RBI’s website. In exploring causal relationship between GDP and FDI.

First, the statistical properties of the time series data are examined. Then the data is entered into SPSS for a regression test. Then a linear regression model is performed on the data sets the dependent variable that we have taken is GDP and the independent variable in this data set is FDI. The analysis is being done to check whether there is any statistical significance between the dependent and the independent variable. We have assumed the level of significance at 0.05.

Empirical Results

The Real GDP growth (Annual percentage change) and the percentage change in FDI for the BRICS had been taken from the year 1980 to 2018 and a time series data had been analyzed.

Conclusion

We have found that the FDI inflows is having significance in the GDP of a country this justifies that GDP of a country depends on the FDI inflows and in both the cases the coefficient for FDI is very small that is for every one unit change in FDI inflow there is relatively a very small change in GDP. This clearly states that FDI is one of the factors which can affect the overall GDP of a country but the contribution is very low. However, percentage increase in FDI inflows is not playing a significant role in economic growth rate (rate of change of GDP) this shows that there is no causal connection between FDI and Economic growth.