Foreign direct investment of India: an analysis based on ‘dynamic or developmental approach’

Abstract

This study draws on a ‘dynamic or developmental approach’ to international production as its analytical framework. The analysis is based on multivariate time-series data for the time period of 1980–2014. Its purpose is to investigate the dynamic relationship between foreign direct investment (FDI) position of India and home-country macroeconomic factors both in the short-run and long-run, employing vector error correction modelling (VECM). The study finds that the macroeconomic variables have a long-run impact on FDI position of India (captured by net OFDI), although no causality has been witnessed in the short-run. Dynamic analyses such as Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) are also used to examine the long-run time path and endogenous structure of the variables, respectively.

Keywords:

• Developmental approach
• OFDI
• VECM
• macroeconomic factor

Notes

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on contributors

Munmi Saikia is a research scholar at the department of Humanities and Social Sciences in Indian Institute of Technology Guwahati. Her research interest is in the areas of international finance, macroeconomics and econometric analysis.

Saundarjya Borbora is a Professor at Indian Institute of Technology Guwahati. He is teaching mainly in the fields of entrepreneurial development and development finance.

Notes

1 ‘A country’s net foreign direct investment position is the sum of direct investment by its own enterprises outside its national boundaries minus the direct investment of foreign owned enterprises within its boundaries’, (Dunning, 1981: p. 30). Net OFDI (net OFDI = OFDI − IFDI) is used to represent the FDI position of a country.

2 ‘Third stage’ of IDP is indicated by falling net OFDI. Both IFDI and OFDI increases but the increase in IFDI is greater than the rise in OFDI. So, net OFDI is negative. See ‘Explaining the Investment Position of Countries: Towards a Dynamic and Development Approach’ (Dunning, 1981) for details about the stages of investment development path.

3 ‘First wave’ of OFDI began during 1960s and 1970s.

4 ‘Second wave’ of OFDI started in between 1990s and 2000.

5 FERA was enacted in September 1973 and came into force from 1 January 1974. The main objective of it was to regulate the foreign payments, regulate the dealings in foreign exchange and securities, and conservation of foreign exchange for the nation.

6 FEMA is, ‘An act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and proper utilization thereof in the interests of the economic development of the country’ (RBI, 2005). The parliament enacted the FEMA in 1999 to replace the FERA. The scope of OFDI from India has expanded after the initiation of the FEMA (Khan, 2012).

7 Ownership advantage – Dunning defines ownership or ‘O’ advantage as the possession of specific assets of both tangible and intangible by a firm which are not possessed by its competitors, The idea of ‘ownership advantage’ is taken from the concept of ownership of the market power of the firms which is described by Lall (1976). Market power is the ability of the firms to overcome the intrinsic disadvantage of operating abroad. Lall (1976) says ‘Market power is not easy to define, since it represents a departure from a hypothetical (and usually quite unrealistic) competitive market situation. It may, however, be simply as the ability of particular firms, acting singly or in collusion, to dominate their respective markets (and so earn higher profits), to be more secure, or even to be less efficient, than in a situation with more effective competition (or official control, where technology demands high degrees of concentration in production). The concept may, of course, be applied to buyers (monopsonists) as well as sellers’. Location advantage is the advantage that is specific to a particular location.

8 OLI means ‘ownership advantage’, ‘location advantage’ and ‘internalization advantage’ of international production.

9 Internalization advantage is the adoption of the location advantage with the given ownership advantage of the firm and how efficiently a firm internalises the location advantage is defined by the firm’s capability which is represented by the ‘O’ advantage of the firms.

10 ‘H’ implies the role of home country factor (Kalotay & Sulstarova, 2010).

11 Cointegration and cointegrating equations have been used interchangeably in the present study.

12 More open domestic and foreign market during 1990s, collapse of communism, conclusion of Uruguay Round trade deal, creation of WTO, deregulation and privatization of telecommunications, radical changes in the information and communications technology and spread of internet facility have helped Indian companies to expand their national boundaries towards the foreign locations (Ramamurti, 2009).