Abhinav

International Monthly Refereed Journal of Research In Management & Technology

Volume III, January14

ISSN 2320-0073

IMPACT OF FDI ON INDIAN ECONOMY

Dimple Goyal1 and Ritu Jain2
1

Assistant Professor of Commerce, Aggarwal College, Ballabgarh, Faridabad, India

Email: dimplegoyal7nov@gmail.com
2
Assistant Professor of Commerce, F.C. College for Women, Hisar, Haryana, India
Email: ritujain_200@yahoo.co.in

ABSTRACT
FDI play an important role in economic development of a nation. A countrys technology
level and sectoral development is depending upon the level of FDI inflows. The purpose of
this study is to analyze the trend of FDI equity inflows in different sectors and regional
offices. This paper also helps to know the share of top investing countries in FDI equity
inflows in India. In order to obtain the objectives of this study, we used secondary data for
the periods of 2000-2013. The secondary data has been collected from various journals,
books, Newspapers and websites etc. The maximum FDI inflows can be seen in the Service
and construction sector while telecommunication, computer hardware and drugs sector
attract the equal FDI equity inflows i.e. 6% of total FDI inflows. The results also presented
that India have received maximum FDI inflows from the Mauritius and followed by the
Singapore. The detailed discussion about the Foreign Direct Investment is an original
contribution of this paper.

Keywords: Foreign Direct Investment; Equity Inflows; Sectors

INTRODUCTION
FDI play an important role in economic development of a nation. A countrys technology
level and sectoral development is depending upon the level of FDI inflows. Basically,
foreign direct investment (FDI) is that investment which is done by a company of another
country into different business of a country either by buying and taking the controlling of a
company in the country or by growing operations of an existing business in that country.
With the help of FDI, the foreign direct investors can acquire the voting power or right of an
enterprise by making FDI there. Investors invest there to avail a lot of benefits such as to
take advantage of cheaper wages, benefits in taxation and some others privileges offered by
the host country
Such investments can take place for many reasons, including to take advantage of cheaper
wages, special investment privileges (e.g. tax exemptions) offered by the host country. On
the other hand, FDI is also beneficial to the host country like FDI help in employment
generation and reduce poverty, capital formation and increase in the level of standard
transfer of new technology, increase in tax revenues etc. Mainly, host countries provide
privilege for FDI investment into infrastructure, information technology, research &
development and other projects to boost development.
The concept of foreign investment comes from the Foreign Exchange Management Act
(FEMA) in 1991 driven by the finance minister Manmohan Singh. Basically FDI is
classified as Inward FDI and outward FDI. Inward FDI means those foreign investments
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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
ISSN 2320-0073

Volume III, January14

which are invested in local resources and outward FDI referred to as direct investment which
is invested abroad. Foreign investors will granted the power of management and voting right
if the level of ownership is greater than or equal to 10% of ordinary shares.
REVIEW OF LITERATURE
The vast literature on foreign direct investment and multinational corporations has been
surveyed. Some literature about this study are presenting here-in-under:
Hausmann and Fernandez-Arias (2000) explored the limitation attach with FDI. The study
recommended that the foreign companies will bring minimize new technology because of
fear of acceptance and also do not want to leakage their technology.
Lipsey (2002) discovered the effect of inward FDI on the economic growth of host country.
If foreign firms at the expense of lower productivity in domestic firms achieve higher
productivity, there might be no implications for aggregate output or growth. Alfro (2003)
explored the effect of FDI in the primary, manufacturing, and services sectors. The study
concluded that FDI flows into the different sectors of the economy (namely primary,
manufacturing, and services) exert different effects on economic growth. FDI inflows into
the primary sector tend to have a negative effect on growth, whereas FDI inflows in
manufacturing sector have a positive one.
Hillman et.al. (2005) analyzed the impact of regulation of a country on its FDI inflows. In
this study author has divided host countries in two parts i.e. developed countries and less
developed countries. The finding of the study revealed that regulations played a significant
and positive role to mobile FDI. It was also depicted that in less developed countries, FDI
was affected by the opinion of MNCs about the governance and regional predisposition
towards corrupt practices in less developed countries.
Read (2007) studied the factors effect on foreign direct investment in small island
developing states. The study revealed that middle income group and population size found
negative but insignificant relationship with FDI inflows. Openness to trade and location
found positive as well as significant relationship with FDI inflows. Andraz and Rodrigues
(2009) find out the causes of economic growth in Portugal export or inwards FDI. Threestage procedure has been used to analyze the possible causal relationships between exports,
inward foreign investment and economic growth in Portugal and identify their direction. In
the long run there is a relation between FDI and exports but in short run there is bio direction
casual relationship between FDI and growth and univariate relation between FDI to export.
Jiang et.al. (2010) conducted a study to know the impact of FDI on Chinese culture. To give
the results, data has been collected from the major Chinese cities and found that FDI has
significant effects on the degree of future orientation, performance orientation and group
collectivism. It was found that FDI from Japan, Singapore, USA and UK has significantly
negative effects on the degree of performance orientation. The study has concluded that FDI
from Japan and Singapore has a significantly positive effect on the degree of in-group
collectivism. Ramasamy and Yeung (2010) examined the relation between FDI, wages and
productivity in china. Data had been collected from a panel of provinces for the period of 20
years (1988-2007). For analyzing the data, provinces had been divided in coastal and inland
provinces. It was found that FDI inflow influenced the wage rates and has a positive effect
on productivity.
Yuan et.al. (2010) observed the relation between size of government and FDI inflow of host
country. To achieve this objective, data has been taken for the period 2002 to 2006 of 81
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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, January14

ISSN 2320-0073

countries. It was found that there is a positive relationship between size of government and
FDI inflows. This effect is much stronger in developing countries. The study suggested that
government should increase their consumption, develop infrastructure for providing good
environment and favorable legal environment to attract foreign investors. Renuka, Ganesan
and Durgamani (2013) have conducted a research on impact of FDI in Indian economy with
reference to retail sector in India. Objectives of the study were to know the reasons to invest
in India, analyze the impact of FDI in retail sector in India and to know the trends in
different sectors in India. Data has been collected with the help of secondary data.
Liberalization of trade policy and less barriers and restrictions to the foreign investment in
the retail sector of India, have made the FDI in retail sector easy. It was found that most of
the foreign countries liked to invest their amount in service sector, Construction Industry,
Telecommunications and Computer software and Hardware, because these sectors earn more
profit in compared to others. FDI in retail sector help to bring new technology in India,
improve rural infrastructure, reduce wastages of agriculture produces etc.
RESEARCH METHODOLOGY
For achieving the purpose of the study, data has been collected from the secondary sources
over a period of 2000-2013. The data is collected mainly from several websites, annual
reports, World Bank reports, research reports, fact sheet on foreign direct investment, press
notes of government of India, FDI database etc. Statistical tool percentage is used to analyze
the data.
OBJECTIVES
We are presenting the objectives of this study which are here-in-under:
1. To know the trend of FDI inflows in India.
2. To Study the pattern of FDI inflows in different sectors of India.
3. To study the equity inflows in various state of India.
4. To study the share of top investing countries in FDI equity inflows.
ANALYSIS AND INTERPRETATION
To achieve the objectives of this study we make an analysis on the basis of collected data.
The results on the basis of secondary data are following as under:
Table 1. FDI Inflows in India
(Amount US$ in Millions)
Financial year
(April- March)
2000-2001
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009

Total FDI
inflow
4029
6130
5035
4322
6051
8961
22826
34843
41873

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Percentage growth
over previous year
--+ 52
-18
-14
+40
+48
+146
+53
+20
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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, January14

ISSN 2320-0073

Table 1. FDI Inflows in India (Contd.)

(Amount US$ in Millions)
Financial year
(April- March)
2009-2010
2010-2011
2011-2012
2012-2013

Total FDI
inflow
37745
34847
46553
36860

Percentage growth
over previous year
-10
-08
+34
-21

Source: RBI Bulletin

Figure 1. FDI Inflows in India

Table 1 presents the inflows of FDI for the period of 2000-2013. The results show that there
is large fluctuation in the pattern of FDI inflows. In the year of 2001-2002, there is a positive
increase in the value of FDI inflows due to various reasons such as heavy demand of Indian
consumers, liberalized government policy, communications facilities but after this period the
value of FDI is decreased. The value of FDI is increased from the period of 2004 to 2008 but
after this value of FDI is decreased due to decline in the money value of rupees.
Table 2. Sectors Attracting Highest FDI Equity Inflows
(Amount in Rs. Crores)
SN

Sectors

1
2
3
4
5
6
7
8
9
10

Service
Construction
Telecommunication
Computer Hardware And Software
Drugs & Pharmaceuticals
Chemicals
Automobile Industry
Power
Metallurgical Industries
Hotel & Tourism

FDI
Inflow
178046
103140
58797
54019
54333
42567
42746
37336
35904
33954

Percentages of
Total FDI Inflow
19
11
6
6
6
5
4
4
4
3

Source: RBI Bulletin

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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, January14

ISSN 2320-0073

Figure 2. Sectors Attracting Highest FDI Equity Inflows

FDI Inflows in Different Sectors in India
Table 2 shows the trend of FDI equity inflows in different sector from the period of April
2000- July 2013 in India. The results revealed that maximum contribution (28 percent) of
FDI inflows in service sector. After this investors prefer to invest in construction industry
(16 %), telecommunication (9 %), computer software and hardware (9%) and drugs &
pharmaceuticals (9%) because these sectors are more profitable as compared to others.
Services sector includes financial, banking, insurance, non-financial, outsourcing, R&D,
courier, tech. testing and analysis.
Table 3. FDI Equity Inflows Received According to State Wise
(Amount in Rs. Crores)
SN
1
2
3
4
5
6
7
8
9
10

RBI - Regional Offices

Maharashtra, Dadra & Nagar
Haveli, Daman & Diu
Delhi, Part Of Up And Haryana
Tamil Nadu, Pondicherry
Karnataka
Gujarat
Andhra Pradesh
West Bengal, Sikkim,
Andaman & Nicobar Islands
Chandigarh, Punjab, Haryana,
Himachal Pradesh
Madhya Pradesh, Chattisgarh
Kerala, Lakshadweep

Amount of
FDI Inflow

Percentages of
Total FDI Inflow

301,553

32

172,599
58,397
53,215
40,469
38,551

18
6
6
4
4

11,092

5,654

5,480
4,589

0.6
0.5

Source: RBI Bulletin

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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
Volume III, January14

ISSN 2320-0073

Table 3 depicts the region-wise FDI inflows for the period of April, 2000 to July, 2013. The
results reveal that Maharashtra, Dadra & Nagarhavali, Daman & Diu got the highest inflows
which are 32% of total FDI. Delhi, Part of up and Haryana got second position by taking
18% of total FDI followed by Tamilnad and Karnatka by taking 6% of total FDI. There is
only 0.5 percent of FDI contribution in the state of KERALA, LAKSHADWEEP
Table 4. Share of Top Investing Countries in FDI Equity Inflows in India
(Amount Rupees in Crores)
Ranks
1.
2.
3.
4.
5.
6.
7.
8.
9
10.

Country

Inflows

Mauritius
Singapore
U.K.
Japan
U.S.A.
Netherlands
Cyprus
Germany
France
U.A.E.

351,754
102,585
80,874
71,433
53,013
45,346
33,133
28,377
17,503
11,679

Percentages to
total Inflows
38 %
11 %
9%
7%
6%
5%
4%
3%
2%
1%

Source: RBI Bulletin

Table 4 presents the FDI equity inflows from top ten countries like India received maximum
FDI from Mauritius, followed by Singapore, U.K, Japan and U.S.A by securing rank first,
second, third, fourth and fifth respectively. The main reason for higher levels of investment
from Mauritius was that the fact India entered into a double taxations avoidance agreement
(DDTA) with Mauritius were protected from taxations in India.
CONCLUSION
The main objective of this study is to analyze the trend of FDI equity inflows in different
sectors and regional offices. It is concluded from the results that there are high variation in
the inflows of FDI equity. The results also revealed that maximum contribution (28 percent)
of FDI inflows in service sector and the Maharashtra, Dadra & Nagarhavali, Daman & Diu
got the highest inflows which are 32% of total FDI. This study will help the government to
make vigilant planning to manage and boost the foreign direct investment.
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Abhinav
International Monthly Refereed Journal of Research In Management & Technology
ISSN 2320-0073

Volume III, January14

4. Borensztein, E., J. De Gregorio, and J-W. Lee. (1998), How Does Foreign Direct
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