An Econometric Analysis of Foreign Investment Flows into India

Objectives: To look at the determinants of foreign investment inflows into India and further to see its inter-dynamic relationships with macroeconomics fundamentals in India.

Methods/Statistical Analysis: The study was done for the period of 1996 Q1 to 2017 Q2, using the secondary data from RBI handbook of statistics. Augmented Dickey-Fuller test was employed to check the stationary of the data. Regression analysis was employed to look at the determinants of foreign investment flows into India and Vector Auto-regression model was used to look at the inter-dynamics between foreign investment and macroeconomic fundamentals in India.

Findings: Looking at the causal relationship between GDP and FINV, we found it is unidirectional from GDP to FINV. Thus we can infer that robust economic growth in India attracts FINV. The study found that GDP, BSE Sensex, EXC, INF, ROI, and CAD are the major determinants of foreign investment in India. GDP, BSE Sensex, and ROI have a positive impact and among them, GDP is the most significant factor in attracting foreign investment. Whereas, variables like EXC, INF, and CAD have a negative relationship with foreign investment. Using the same dataset, we have estimated an unrestricted VAR model to look at the inter-dynamics between FINV and some macroeconomic fundamentals like GDP, INF, ROI, RES, and EXC. From the result, we see variables are dynamically interrelated. Further looking at the impulse function we see that response of one variable for a given shock in another variable is in tandem with economic theory.

Application/Improvements: The policy implication arising from the study is that strong macroeconomic fundamental and sound internal and external policies are required to attract foreign investment.