Macroeconomic impact of FDI inflows: an ARDL approach for the case of India

Abstract

This article investigates the dynamics of relationship between foreign direct investment (FDI) inflows and major macroeconomic variables, i.e. gross domestic product (GDP), exports and exchange rate for India. Using annual time series data, the empirical analysis has been carried out for the period 1980–2012. Using the most recent autoregressive distributed lag (ARDL) testing approach to cointegration proposed by Pesaran et al., 2001, the study concludes that there is a strong evidence of long-run relationship between variables with GDP, FDI inflows and exports as the dependent variable. However, there is lack of evidence of long-run cointegration with exchange rate as a dependent variable. The results indicate bilateral positive and significant relationship between FDI inflows and GDP; and GDP and exports in the long run and short run. In contrast, the result analysis indicates negative impact of FDI inflows on exports in the long run. Moreover, exchange rate appreciation has a positive impact on FDI inflows and exports, but negative on GDP in the long run. The error-correction term (ECT) for the models signifies a fairly quick speed of adjustment to the equilibrium following a shock. Furthermore, the study also observes long-run causality running from the explanatory variables towards the respective dependent variables.

Keywords:

• Foreign direct investment
• gross domestic product
• exports
• exchange rate
• India

Disclosure statement

No potential conflict of interest was reported by the author.