Macroeconomic Determinants of Foreign Direct Investment: Evidence from India

Pami Dua · Reetika Garg

33 citations0/0 files storedThe Journal of developing areas

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International Business and FDI Global trade and economics Global Financial Crisis and Policies

Abstract

This study examines the macroeconomic factors underlying FDI flows to India using cointegrating VAR with I(1) exogenous variables. The results indicate that conventional determinants such as a depreciating exchange rate, higher domestic returns, higher domestic output and better infrastructure are conducive to FDI flows to India. The results also indicate that macroeconomic instability has adverse effects while credit worthiness is conducive to FDI flows. A negative relation between trade openness and FDI is observed suggesting that FDI flows to India may be tariff jumping in nature. Empirical estimates also indicate that an increase in global FDI flows to other emerging economies reduces FDI flows to India indicating that India competes with other emerging economies in receiving FDI. Further, the results show that higher foreign output is conducive to FDI flows indicating procyclicality of FDI with economic performance of foreign countries.

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