Determinants of foreign direct investment in India: an empirical analysis

Abstract

Foreign direct investment (FDI) inflows to the developing countries have increased with a greater pace in the 1990s accounting for about 46.1 % of global FDI inflows in the year 2010. Similar trends have also been visualized in India where FDI has expanded rapidly following the economic reforms initiated in the early 1990s. These were directed towards increased liberalization, privatization and deregulation of the industrial sector, integrating the economy with that of world economy by reducing trade barriers and adapting favourable policy framework towards expansion of foreign investment in the country. This has made Indian economy a favourable destination for foreign investors. The present study explores the determinants of FDI that influence the inflows of FDI into India. Explanatory variables used in the study are gross domestic product (GDP), foreign exchange reserves (RES), long-term debt (LTD), inflation (INF), exchange rate (EXCH) and openness (OP). Empirical analysis concludes that the variables OP, Reserves, GDP and LTD have found to have positive impact on FDI, while negative impacts of INF and EXCH on FDI have been noticed.