An Empirical Study On The Inter-relationship Among Foreign Direct Investment,Institutions,Economic Growth,and Domestic Investment In India

Most developing countries consider FDI as an important channel to access resources for economic development.India has witnessed rapid economic transformation and growth since the beginning of economic reforms in 1991 following economic integration,internationalization,globalization and industrialization.Previous empirical studies have found a positive effect of FDI on India’s economic development.This study plans to investigate the institutional factors which attract the investment to India and the impact of the inward FDI on economic growth overall and at sectoral level.The first research question is the determinant of FDI in India with concerning the institutional framework.Institutional factors are gaining much importance as determinants of inward FDI for emerging markets.Different with the previous empirical work on the FDI determinants in India,we examined the institutional determinants of India’s FDI inflows as well as the relative importance of these factors.Related to first question,in the second part,we have examined the impact of FDI on economic growth in India and also,how institutions effect the relationship between FDI and economic growth.The study found that certain institutional determinants such as(legal structure and strong property rights),(Regulations of the Credit market,Labour market,and Business),(size of government),and(Access to sound money)have a strong effect on FDI inflows.Among the overall institutional variables,access to sound money and regulation have been found to be most important to influence inward FDI flow to India.Regarding the impact of FDI on economic growth,it is found that the institutions threshold is 6.54,that means if institutional quality index is above 6.54 than India will benefit positively from FDI inflows.The second study traces the impact of sectoral FDI on economic growth.the study instrumental variable approach has been applied to investigate this research question.Financial services FDI and Information and communication in FDI have greater impacts on sectoral economic growth.Third study of this dissertation analysis the crowding in or crowding out impact of overall and sectoral FDI on domestic investment in Indian economy.Using ARDL cointegration method,the results show that overall FDI and FDI in tertiary sector crowds out domestic investment in long run while FDI crowds in domestic investment in short run.