Trends and Determinants of Foreign Direct Investment in India:A Study of the Post-liberalization Period

Foreign Direct Investment (FDI) is a pivotal instrument for economic development and bridging the gap between developed and developing nations. Rising economies grant special incentives to attract FDI and empirical literature is replete with studies on the determinants of FDI inflows in India. In this paper, we have identified trends of FDI inflows, made a framework of pre-revised and post-revised FDI regimes and identified relevant determinants of FDI in India by employing an Ordinary Least Square Regression (OLSR) analysis. Data from August 1991 to February 2014 has been used for identifying trends and policies for FDI inflows and the annual series from 1991 to 2010 has been used for calculating the determinants of FDI inflows. In this study, FDI inflows are modeled as a function of market size, openness, infrastructure (electricity), interest rate and inflation. Results show that market size and infrastructure are major factors that have a positive and significant effect on FDI inflows. This paper suggests ways to make India’s economic policies more effective for increasing inflows for developing infrastructure. A successful FDI policy must be well integrated with liberalization, privatization and globalization policies.