A Causal Relationship between Foreign Direct Investment and Economic Growth in India

Abstract

This study investigates the relationship between Foreign Direct Investment (FDI) and economic growth for India over the period 1990-91 to 2016-17. The literature on foreign direct investment (FDI) and economic growth generally points to a positive FDI and Growth relationship. However, very few studies offer direct tests of causality the two variables. In theory, economic growth may induce FDI inflow, and FDI may also stimulate economic growth. This paper adds to the literature by analyzing the existence and nature of these causal relationships. The present analysis focuses on India, where growth of FDI has been the most pronounced. The Co-integration analysis suggested that there is a long-run equilibrium relationship. The results of Granger causality test showed that there is a causal relationship between the examined variables. Economic growth and FDI appear to be mutually reinforcing under the open-door policy.