ZENITH International Journal of Business Economics & Management Research__________ ISSN 2249- 8826

ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52

Online available at zenithresearch.org.in

FOREIGN DIRECT INVESTMENT: TREND ANALYSIS AND ITS

IMPACT ON GROSS DOMESTIC PRODUCT
MR.NAVEEN KUMARA R,
ASST. PROFESSOR, CHRIST UNIVERSITY, BANGALORE

MS SINDHU R
RESESRCH SCHOLAR, CHRIST UNIVERSITY, BANGALORE

MS KARMA CHOEDON
RESESRCH SCHOLAR, CHRIST UNIVERSITY, BANGALORE

ABSTRACTS:

Foreign Direct Investment (FDI) is an investment made in other country on business interest by
an individual or a company either by acquiring the business assets as ownership or having a
strong control on the interest in a foreign country or establishing a business operation differently.
India is one of the countries that have been getting benefits from FDI through different industries
which add on to the value of overall development of the country one of the important economic
indicators to measure the growth of an economy is Gross Domestic Product. This article tries to
study the impact of FDI on the GDP and to also find the time required for FDI to have an impact
on GDP. The data taken here are from 1996 to 2016 to find the impact of FDI on GDP by
applying Granger causality test too find if there is casual relation between the two and VAR
model is used to find how long FDI takes to have an impact on GDP. Data from 2001to 2016 is
taken to see the growth rate of FDI in different sectors by using Compound Annual Growth Rate.
The of the study show that, FDI has an impact on GDP and a gap of two years is required for
FDI to have an impact on GDP.

KEY WORDS-Foreign Direct Investment, Gross Domestic Product, Time lag, Trend.

INTRODUCTION

India is one of the fast growing economies in the world, the two major crisis- the uncontrollable
balance of payment and high inflation in the 1980’s led to the approvals for Foreign Direct
Investment (FDI) in 1991 to have a balance in the economy. Since then there have been many

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

changes in the economic policies of the country, based on various economic need. As in line with
the policies there has been an increase in the flow of investment in various forms. FDI plays a
vital role by bridging the gap between domestic saving and capital requirement and helps to fulfil
it. It not only plays the role of bringing in the capital, but also acts as a major player to bring in
new technology and knowledge to the country. To a developing country like India it helps to
generate employment, overcome the deficit in the balance of payment and create new
opportunities.

FDI helps a host country takes advantage of vast markets. It is a gateway for companies to
expand its operation to other countries. In India for a company to enter in the form of FDI there
are two routes. One through Automated route, where no prior approval is required by the
company to investment in sectors approved by the government at a given percent. The other is
Government route, for this a company has to take approval prior to investment from Foreign
Investment Promotion Board (FIPB), Department of Economic Affairs and Ministry Of Finance.

One of the important tools to measure the economy is Gross Domestic Product (GDP). GDP is
the total market value of final goods and services produced by a country over a period of time.
The volume of goods and services produced during a period has various factors affecting, like
FDI, the Purchasing power of money, consumption of goods, government spending.

GDP = C + I + G.

Hear C is the Consumption of Goods, I is the Investment in the economy and G is the
government spending.

As the equation states investment to the economy is one of the vital contributing factors for
GDP, and for a developing county FDI is a vital source of investment in the economy. In this
regard this paper tries to bring out the effect of FDI on GDP and the time lag required for FDI to
impact on GDP.

Another major reason for this study is to know the impact of various FDI policies in India
amended by the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce
and Industry, Government of India. FDI was introduced under the Foreign Exchange
Management Act (FEMA) in 1991, from then on based on the economy of the country DIPP has

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

made an amendmentto this act. In this context this paper tries to study the trend of FDI inflows
for the period.

REVIEW OF LITERATURE
(E. Borenszteina, 1998) Suggested that if there is minimal threshold of human capital in a host
country, there is higher hold of FDI productivity. Thus, host country having sufficient absorptive
capability of advanced technologies faces high economic growth from FDI. (Qaiser Abbas,
2011)found that there is a positive and significant relationship between GDP and FDI and an
insignificant relationship between GDP and inflation.(Arafatur Rahaman, 2015) Concluded
saying that Asian countries are having low FDI as compare to other countries and especially
Bangladesh has to develop in terms of labor, power, infrastructure and electricity to have friendly
macroeconomics investment o attract more FDI. (Dr. Mohd. Yameen, 2015) Documented that
among all destination of global investment including World Bank, India ranked consistently in
the top three as per the United Nation report. According to (Alfaro, 2003) foreign direct
investment plays a negative role in the primary sector and on the other hand a positive role in the
manufacturing sector.
(ANITHA, 2012) Stated that foreign direct investment played an importent role in the long-term
development of a country. Forecasting technique, Autoregressive Integrated Moving Average
(ARIMA) to know the future inflows of foreign direct investment. (S.Chandrachud, 2013)
Highlighted how Indian economy chooses the nature of FDI to have an impact on the country
economy and suggest various reforms to attract FDI in the country. (Malhotra, 2014). Studied on
trend, pattern and determinants of FDI and its impact on Indian Economy. In or to generate FDI,
the government of India should liberalize FDI policy. (Nosheen, 2013) Found that there is a long
term relationship between FDI and GDP, through co-integration analysis. According to
(Agrawal, 2011) India’s growth is less affected by foreign direct investment than China’s
growth. 0.02% increase in GDP of India and 0.07% increase in GDP of China resulted from 1%
increase of FDI. (Raju, 2016) Concluded by saying that FDI is a strong factor among other
factors that is influencing the economic growth in India. It provides a sound base for economic
growth and development by enhancing the financial position of the country. (P, 2015). Found
that as per CAGR, communication sector attracts higher inflow and manufacturing sector as the
share. The other Indian sectors were, in fact is having quite poor foreign direct investors’

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
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interest. (Kumar, 2012) Stated that FDI and GDP have positive correlation and concluded on FDI
having an important role on economic growth.(Jita & Mousumi, 2012) Found that there was a
long-term relationship between FDI, service trade, merchandise and economic growth of India.

OBJECTIVES OF THE STUDY

The objectives of the study are,

1. To study the impact of FDI on GDP.

2. To know the time gap required for FDI to have an impact on GDP.
3. To analyze the trend of inflow of FDI in various sectors.

HYPOTHESIS

 H0- there is no significant impact of FDI inflow on GDP.

 H1- there is a significant impact of FDI inflow on GDP.

RESEARCH METHODOLOGY

PERIOD OF STUDY

For the study of the impact of FDI inflows on GDP and to find the time lag required for FDI to
impact GDP data from 1996 to 2016 data is used. Then for the sectorial analysis of data FDI
inflows from 2001 to 2016 is used.

DATA COLLECTION

The sources used to collect the data are from International Monetary Fund, World Bank, Reserve
Bank of India, and Handbook of Statistics on the Indian economy, Department of Industrial
Policy and Promotion (DIPP), Secretariat of Industrial Assistance (SIA), Central Statistical
Organization (CSO), Government of India websites.

STATISTICAL TOOLS

To study the impact of FDI on GDP Granger causality test is used and to kind the time lag
required for one variable to impact of the other VAR lag order selection criterion was used. For

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

this Eviews Software is used for analysis. To study the trend of FDI inflows over the period
Compounded Annual Growth Rate (CAGR) is used.

ANALYSIS AND INTERPRETATION

Trend flows of FDI and GDP

Graph 1 – Trend of GDP of India

Gross domestic product( billion)

180000.00
160000.00
140000.00
120000.00
100000.00
80000.00
60000.00
40000.00
20000.00
0.00

Source- IMF Data Base

This graph 1represents that GDP inflows over the period of study follow an upward trend and
have a positive trend. I order to find stationarity of the data Unit Root test was run and from the
results it is found that at one level difference and intercept, the data was a station.

Graph 2 – Trend of inflows of GDP in India

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

FDI ( in Billion)
3500.00

3000.00

2500.00

2000.00

1500.00

1000.00

500.00

0.00

Source- RBI Data base

Graph 2 depicts the inflow of FDI was very minimal till 2005, from there on we can see an
increasing trend in inflows of FDI. To check the stationarity of data Unit root test was run
through the data, from the results it is found that data is stationery at a 2 difference and intercept.

Table no. 1 – Results of Granger Causality Test

Variables F-Statistics Probability

FDI ( independent variable) 6.95355 0.008
GDP (dependent variable)
Source- Views analysis result.

With the help of E-view software Granger causality test and Unit root test was run to study the
impact of FDI on GDP. The Result of Granger causality test with two lag difference the F-
statistic Value was 6.95355 and Probability value was 0.008.

The results of the study shows that that p-value (probability value) is less than 0.05, thus we will
not accept Null hypothesis and accept the alternative hypothesis. From this we can say that there
is a causality relationship between FDI and GDP and FDI has a positive Impact on GDP. The
results of F- statistic is lesser than the table value thus we can conclude that the independent
variable FDI has a positive impact on dependent variable GDP.

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ZENITH International Journal of Business Economics & Management Research__________ ISSN 2249- 8826
ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

Before conducting Granger Causality test, Unit root test was run through the data, from the
results it is found that data is stationery at a 2 difference and intercept.
For the next objective of the study, to find the time lag required for FDI to have an impact on
GDP VAR lag order selection criterion was used. From this it is found that FDI needs two years
to impact on GDP with the reference of Akanke information Criterion.

Graph 3 – Sectorial inflow of FDI of top ten sectors

FDI Sectorial Inflow Hotel & Tourism

30000
Power
25000
Trading
20000
Chemicals (other Than Fertilizers)

15000 Drugs & Pharmaceuticals

Automobile Industry
10000
Telecommunications
5000 Computer Software & Hardware

0 Construction Development
Services Sector

Source- RBI data base

For analysis top 10 sectors inflows has been taken from this is shows that services sector has the
highest inflow of inflow over the years, construction has seen the 2 nd highest inflows over the
period, it is followed by computer software and hardware, telecommunication, automobile, drugs
and Pharmaceuticals, chemicals, trading power and hotel and tourism.

The data shows that till 2006-2007 the inflows of FDI to India was very less. From 2006-2007
we can see a drastic increase in the inflows of FDI and thereafter there has been an increase in
inflow till 2009-2010. 2010-2011 follows a downward trend following the previous year. In
2011-2012 we can see a positive upward trend, but the trend isn’t the same for next two years.
Finally from 2014 we can see a positive trend and in the year 2016 we can see the highest
inflows of FDI over the period of study.

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

Table no. 2 – Results of CAGR of FDI

Sector CAGR
Rubber Goods 70%
Mining 49%
Trading 47%
Sea Transport 41%
Consultancy Services 38%
Textiles (including Dyed; printed) 37%
Industrial Machinery 36%
Hotel & Tourism 36%
Services Sector 36%
Machine Tools 35%
Medical And Surgical Appliances 26%
Computer Software & Hardware 24%
Electronics 24%
Drugs & Pharmaceuticals 22%
Metallurgical Industries 22%
Grand Total 21%
Chemicals (other Than Fertilizers) 19%
Automobile Industry 19%
Ceramics 18%
Fermentation Industries 18%
Information & Broadcasting (including Print Media) 18%
Food Processing Industries 17%
Petroleum & Natural Gas 17%
Power 16%
Telecommunications 14%
Industrial Instruments 14%
Miscellaneous Mechanical & Engineering Industries 13%
Electrical Equipment’s 12%
Agriculture Services 11%
Construction Development 11%
Agricultural Machinery 11%
Dye-stuffs 8%
Diamond; gold Ornaments 8%
Commercial; Office & Household Equipment’s 8%
Leather; leather Goods And Pickers 4%
Paper And Pulp (including Paper Products) 2%
Scientific Instruments -2%
Glass -2%
Cement And Gypsum Products -8%
Tea And Coffee (processing & Warehousing Coffee & Rubber) -18%
Source- RBI data base

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

From the above analysis it is found that Rubber Goods has the highest growth rate at 70%
followed by Mining at 49%, Trading at 47%, Sea Transport at 41%, Consultancy Services at
38%, Textile at 37%, followed by Industrial Machine, Hotel and Tourism and Service sectors at
36% each. Some of the other sectors like Medical and Surgical Substance at 26%, Computer
Software and Hardware and Electronica at 24%, Chemical and Automobile Industry at 19%
each, Ceramics, Fermentation Industries and Information & Broadcasting (including Print
Media) at 18% each. Food Processing Industries and Petroleum & Natural Gas at 17% each,
Power at 16%, Telecommunication and Industrial Instruments at 14% respectively,
Miscellaneous Mechanical Industries at 13%, Electrical Equipment’s at 12%, Agriculture
sectors, and Construction and Agriculture Machinery has 11%.

Dye-stuff, Diamonds, Golds and Ornaments, Commercial office and Household Equipment at
8% each, Leather, Leather Goods and Pickers at 4% and Paper and Pulp (including paper
products) have 2%.

Some of the sectors had negative inflow rates were Scientific Instruments and Glass has 2%
decrease, Cement and Gypsum products have seen a decrease of 8% and Tea and Coffee at 18%
decrease in the rate of flow of FDI.

This results showed how different sectors faced increase or decrease in the flow of funds over the
period of study, the reasons for this is majorly because of the changing FDI policies by the
government.

FINDINGS AND CONCLUSION

The findings of the study are that there is a positive relation between FDI inflows and GDP.
Though there are many factors which affect the GDP of a country FDI plays a vital role. The
study also found that a time gap of 2 years is required for FDI inflows to have impact on GDP.
We could also see a trend in FDI in various sectors over the period. This study concludes that
FDI is a very important source of procuring capital for a country and it affects the economy of
the country.

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ZENITH International Journal of Business Economics & Management Research__________ ISSN 2249- 8826
ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
Online available at zenithresearch.org.in

LIMITATIONS AND FUTURE SCOPE OF THE STUDY

Some of the limitations of the study are data used for the study are annual, study would be more
precise if quarterly data is taken for analysis. Lack of availability of sector wise data for each of
the variable.

Further research can be done to study the trend of FDI using event study can be used to see the
effect of inflows based of the policy by Government.

REFERENCES

1. Agrawal, D. G. (2011). Impact of FDI on GDP: A Comparative Study of China and India.
International Journal of Business and Management.

2. Alfaro, L. (2003). Foreign Direct Investment and Growth: Does the Sector Matter?
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3. ANITHA, R. (2012). FOREIGN DIRECT INVESTMENT AND ECONOMIC

GROWTH IN. International Journal of Marketing, Financial Services & Management
Research.

4. Arafatur Rahaman, S. C. (2015). Effects of Foreign Direct Investment on GDP: Empirical

Evidence from Developing Country. Advances in Economics and Business.

5. Dr. Mohd. Yameen, I. A. (2015). IMPACT OF FOREIGN DIRECT INVESTMENT ON

GROSS DOMESTIC PRODUCT. PEZZOTTAITE JOURNALS.

6. E. Borenszteina, J. D.-W. (1998). How does foreign direct investment affect economic.
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Journal of Business Management and Information Technology.

8. Nosheen, M. (2013). Impact of Foreign Direct Investment on Gross Domestic Product.

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ZIJBEMR, Vol.7 (10), OCTOBER (2017), pp. 42-52
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9. P, S. S. (2015). A Study on the Changing Trends in the Flow of FDI. Arabian Journal of
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