IMPACT OF FOREIGN DIRECT INVESTMENT ON MACRO ECONOMIC PARAMETERS OF INDIA: AN EMPIRICAL ANALYSIS
Dr. Mandeep Kaur Associate Professor Department of Commerce, Guru Nanak Dev University, Amritsar 143005 email: [email protected] [email protected]
Dr. Renu Sharma Assistant Professor P.G. Department of Commerce, K.L.S.D. College, Ludhiana email:[email protected] IMPACT OF FOREIGN DIRECT INVESTMENT ON MACRO ECONOMIC PARAMETERS OF INDIA: AN EMPIRICAL ANALYSIS
Abstract
Foreign direct investment (FDI) is considered to be one of the important factors, which leads to the globalization of an economy. The globalization over the last two decades has been hailed as a major development, which result in economic prosperity in developing countries. The present study analyses the impact of FDI on some macroeconomic indicators in India. Explanatory variables used in the study are Gross Domestic Product (GDP), Foreign Exchange Reserves (RES), Gross Capital formation (GCF), Exports (EXP), Employment (EMP). The technique of Cointegration has been applied to investigate the impact of FDI on the economy of India. Augmented Dickey Fuller (ADF) test and Philip Parron test have also been applied to check the stationarity of data series. Empirical analysis concludes positive and significant impact of FDI on GDP, GCF, EXP, EMP and RES. The value of X coefficient shows a trend from 0.065to 0.634 in India. The minimum variation due to FDI is found out in case of EMP (0.065%) and maximum in Reserves (0.634%).
Keywords: FDI, Impact, India, Macroeconomic Parameters IMPACT OF FOREIGN DIRECT INVESTMENT ON MACRO ECONOMIC PARAMETERS OF INDIA: AN EMPIRICAL ANALYSIS
FDI is a particularly significant driving force behind the interdependence of national economies. Even though most of the FDI flows have always concentrated in the developed countries, its importance is undeniable for developing countries as well. Economic development is a wider concept. It centres on economic and social progress, but also entails many different aspects that are not easily quantified, such as political freedom, social justice, and environmental soundness. All these matters combine to contribute to an overall high standard of living (Sun, 2002).The amount of FDI as compared to China and other developed countries is quite less but it has helped in economic transformation of India.
FDI involves the transfer of managerial resources to the host country. The endogenous growth theories explained the effect of FDI on economic growth through knowledge externalities and the existence of human capital in host developing countries. According to this theory, FDI contributes significantly to human capital such as managerial skills and research and development (R&D). MNCs can have a positive impact on human capital in host countries through the training courses they provide to their subsidiaries’ local workers. Research and development activities financed by MNCs also contribute to human capital in host countries and thus enable these economies to grow in the long term (Lan, 2006).
This study has been categorised into 4 sections. The first section reviews the existing studies on the impact of FDI. Section II explains the theoretical framework of variables under the study and their expected theoretical relationship with FDI. Section III describes data base and methodology. Results and discussion have been presented in Section IV.
Section I Review of literature In this section, the various studies have been explored regarding contributions made by the foreign direct investment inflows towards development of any economy due to its favourable and unfavourable effects on various macro economic variables indicating growth, performance and efficiency of the country. The voluminous literature suggests that the impact of foreign direct investment on economic growth is not straightforward and varies across countries. Using various growth models, these aforementioned propositions have been empirically examined by different researchers. The results of this review are presented in Table 1.
From review of the existing literature regarding finding the impact of FDI on various macroeconomic indicators of growth in the economy it has been observed that several studies like Shan et al. (1998); Agosin and Mayer (2000); Alarm (2001); Chowdhury and Mavrotas (2003); Hansen et al. (2003); Panayides et al. (2003); Sharma (2003); Wen (2004); Lumbila (2005); Athukorola and Sen (1995); Lan (2006); Paolino, M. (2009); Ma (2009) investigated the positive impact of FDI on domestic investment, agriculture, industry, imports, openness, low geographical distance, investment climate, infrastructure, stable macro environment, government expenditure and growth of labour.
Most of the studies conducted in India also found positive impact of FDI on GDP and a few of them evaluated no relationship between FDI and GDP (Mathiyazagan, 2005) while Lo, (2007) investigated negative impact of FDI on GDP. There arises an uncertainty regarding this relationship due to the lack of general consensus among the researchers about the nature of this impact. Therefore, GDP as a parameter of growth has been taken in the present study to verify its exact impact. Mathiyazhagan, (2005) and Sharma, (2003) have not found any significant impact of FDI on exports in India while Alarm (2001); Wen, (2004); Lan (2006) observed positive impact of FDI on exports. It has also been observed from the review of literature that research work regarding finding the impact of FDI on variables like foreign exchange reserves and employment is seriously lacking as these are very important economic parameters reflecting the state of any economy.
After thorough investigation of the findings of various researchers it has been concluded that impact of FDI on some very important macroeconomic indicators like GDP, exports, foreign exchange reserves and employment is either debatable or need further extensive efforts for exploration of the effect of FDI on these variables for India. Table: 1 A Descriptive Review of Literature related to the impact of FDI
Studies Shan Agosin Alarm Chowdh Hansen and Han Panayides et Sharma Mathiyazaga Lumbila L Jallab et Paolino, Tiwari and Das Mehr Gaikwad et al. and (2001) ury and Rand (2003) sen al. (2003) (2003) n (2005) (2005) a al. (2008) M. Mutasku and a (2013) (1998) Mayer Mavrot et al. n (2009) (2011) Das (2013) (2000) as (200 ( (2012) (2003) 3) 2 0 0 6 )
Sample Size China Africa, 2 Chile, 31 developing 5 China India India 47 6 MENA China 23 Asian India India India Asia developin Malaysi countries Asia African 1 Countries Countries and g a and n Countries P Latin countries Thailand coun r America tries o v i n c e s
Period of (1980- (1970- (1985- (1969- (1970-2000) (199 (1990- 2001) (1990- (1990-2001) (1980- ( (1970- (1977- (1980-2008) (1991- (1990- Study 1995) 1996) 1995) 2000) 0- 2001) 2000) 1 2005) 2007) 2000) 2008) 2001 9 Variables ) 9 taken 6 - 2 0 0 3 )
GDP (+ve) - (+ve)* (+ve)* (+ve)* - (+ve)* - NR - (+ve)* (+ve)* (+ve)* (-ve)* (+ve)* (+ve)* *
Domestic - (+ve)* (+ve)* ------( (+ve)* Investment + v e ) *
Agriculture - - (+ve)* ------
Industry - - (+ve)* ------
Imports - - (+ve)* ------
Exports - - (+ve)* - - - - (+ve) NR -
Employment ------NR
Openness - - - - - (+ve - - - - )*
Low ------(+ve)* - - -- Geographical Distance
Gross Fixed - - (+ve)* Capital Formation
Investment - - (+ve)* Climate
Infrastructure - - (+ve)* s
Stable Macro - - (+ve)* Environment
Government - - - ( Expenditure + v e ) *
Growth of ( Labour + v e ) *
Exchange rate ( NR + v e ) *
*indicates the significance of variable; NR indicates no relationship Section II
Expected Impact of FDI on Macro Economic Variables under Study
The endogenous growth theories strongly support the role of FDI in promoting economic growth in host countries. In these theories, FDI is viewed as a way to transfer knowledge, promote learning by doing, bring in technology spillover, and human capital growth. Consequently, FDI stimulates economic growth in host countries (Lan, 2006). There are still inconclusive arguments for and against the role of FDI inflows in enhancing economic growth in a country. Whether FDI inflows are beneficial or not to economic growth especially in host developing countries are still debateable among economists. It is therefore very essential to analyse expected theoretical relationship between FDI and these macro economic variables before doing empirical investigation regarding their relationship. This has been discussed below:
Gross Domestic Product: The most widespread belief among researchers and policy makers is that FDI boosts growth through different channels. It increases the capital stock, stimulates technological change through technological diffusion and generates technological spillovers for local firms. Foreign investment is expected to increase and improve the existing stock of knowledge in the recipient economy through labour training, skill acquisition and diffusion. It contributes by introducing new management practices and a more efficient organization of the production process. As a result, FDI improves the productivity of host countries and stimulates economic growth in terms of increase in GDP (Jallab, 2008). Investigating the impact of foreign capital on economic growth has important policy implications. Positive impact of FDI on economic growth weakens the arguments for restricting foreign investment in the host country. However the negative impact of FDI on growth would suggest a reconsideration of development policies adopted by countries for attracting FDI to enhance the level of their growth (Carkovic and Levine, 2000). Foreign Exchange Reserves: Foreign exchange reserves are the external assets that are readily available to and controlled by monetary authorities for direct financing of payments. It is the total of a country's gold holdings and convertible foreign currencies held in its banks, plus special drawing rights (SDR) and exchange reserve balances with the International Monetary Fund (IMF). Foreign investment causes certain advantages like technology transfer, marketing expertise, introduction of modern managerial techniques and thus creating immense possibilities of increased foreign exchange reserves in the country concerned. Foreign investors are generally considered to be better placed to tap international market than their local counterparts because of their massive assess to the information and marketing networks of their parent enterprises which facilitates their efforts to increase foreign exchange reserves in the host country (Chopra, 2003).
Gross Capital Formation: It is the creation of productive assets that expand an economy's capacity to produce goods and services. Private savings facilitate capital formation by allowing resources to be diverted to corporate investment rather than individual consumption (Scott, 2003). It is very crucial macro economic parameter which determines the growth of an economy. Since FDI establishes backward and forward linkages with local industries, it can also encourage domestic investment by creating an enabling investment environment through transferring technologies and better management techniques. Transnational corporations typically have access to a wide variety of financing options. The risk-adjusted cost of capital is usually lower for them than the domestic firms in developing countries. Foreign firms can undertake projects for which domestic investors do not have the capacities to carry out or which are considered too risky for host country firms. In such cases, FDI also serves to stimulate domestic investment by further boosting the total host country investment. FDI not only adds to external financial resources for host country development, it is also more stable than other forms of financing (Sun, 2002).
Employment: FDI serves as a catalyst for rapid economic growth by enabling developing countries to catch up with advanced economies. FDI plays a major role in the larger development agenda of the host countries. There is one main social aspect of 10 development such as employment. Increasing gainful and secure employment has always ranked high as a policy objective for developing countries. It is a principal means to achieve an equitable distribution of income and higher standard of welfare for the majority of the population. There are three basic mechanisms for FDI to generate employment in the recipient countries. First, foreign subsidiaries employ people in their domestic operations. Second, through backward and forward linkages, employment is created in enterprises that are suppliers, subcontractors, or service providers to them. Thirdly with the expansion of FDI in related industries, employment is also generated in different sectors of the economy. FDI often plays a unique role in employment creation and upgrading of the host countries because of the special features of foreign investments i.e its tendency to be larger in size, with greater technological sophistication, and ability to face more competitive pressures in their product markets as compared to domestic enterprises (Sun, 2002).
Exports: FDI is expected to have strong positive relation with the exports volume. This is quite in tune with common knowledge that export performance is influenced by technology intensity and hence industry associated with high technology efforts has a tendency to export high proportion of their product. Country with an importer of foreign technology can be postulated to have better export performance. This is the reason to assume an improved export performance of a country where FDI stake is high. As exporting involves high degree of risk and uncertainty, so foreign firm with higher profitability due to greater assess to financial resources do better on export front. Export-oriented FDI is of higher quality than the domestic market-seeking FDI. This is because export-oriented companies tend to form micro-level linkages with domestic firms in the form of sourcing and partnerships. Their objective is to exploit the low cost infrastructure and cheap labour skill available locally for export purposes. In addition to knowledge spillovers to local suppliers, export-oriented foreign firms also cause information spillovers to purely domestic firms to enter into export market (Chopra, 2003).
Table 2: FDI and Some Macro Economic Variables in India for the period 1976 to 2013 FDI GDP Reserves Exports GCF EMP Years (in US $ Million) (in US $ Million) (in US $ Million) (in US $ Million) (in US $ Million) (in Thousands)
1976 51 101196 3070 6,854 23,347 192881 1977 36 117421 5765 7,602 25,611 196316 1978 18 135833 6793 8,688 33,351 199826 1979 49 150317 7843 10,268 37,866 203393 1980 79 185402 7354 11488 42,586 262011.8 1981 92 197762 5026 11850 51855 268424.6 1982 72 201927 4634 12235 50179 274736 1983 6 220318 5267 13016 51300 281141.9 1984 19 218222 6141 13952 60683 287766.1 1985 106 227247 6791 12093 52032 294447.3 1986 118 248982 6825 13124 63699 301344.3 1987 121 275529 6979 15654 68350 308525.7 1988 91 304809 5409 18628 81958 315672 1989 252 301764 4325 21339 80348 322843.4 1990 162 327930 2050 23225 91353 329759.8 1991 74 290687 4190 24746 72864 336606.5 1992 277 291925 6326 25982 77443 343260.1 1993 550 284972 10722 28251 66939 349829.4 1994 973 328472 20303 32386 84357 356674.7 1995 2144 370522 18631 40316 108645 363303.4 1996 2821 390520 20848 40881 93960 370192.3 1997 3577 420040 25304 45494 105795 377025.5 1998 2462 428750 27948 47330 100833 384004.4 1999 2155 454952 33159 52885 118966 391142 2000 2339 468970 38341 61886 113835 398362.8 2001 3904 483466 46497 61619 117506 406655.2 2002 8574 503954 68237 73144 127342 415047.3 2003 4585 592535 99806 87543 157705 423616.5 2004 5474 688803 126972 130540 196230 430444.9 2005 6598 808884 132567 161471 250521 438765.7 2006 20336 903226 170843 202354 307580 446882.7 2007 25127 1141346 267582 241711 401231 455348.3 2008 41554 1252403 306429 271645 430036 467231 2009 35657 1338248 266166 260847 429810 471650 2010 27431 1704795 276243 348035 499309 472580 2011 36190 1923046 272249 446375 506613 481098 2012 24196 1875213 271551 443629 532670 489687 2013 28199 1924452 274536 464188 543678 507486 Source: World Investments Reports for the years 1978 to 2014.
12 Table 2 shows the data for FDI and some macro-economic variables for a period of 38 years i.e. 1976 through 2013. This table shows that all the variables have shown increasing trends with the passage of time. FDI has shown increasing but fluctuating trend from the year 1976 to 2013. India’s GDP was found to be 101196 US $ million in the year 1976 and has increased 19 times in the year 2013 (1924452 US $ million). Foreign exchange reserves in India (274536 US $ million) were noticed to be higher than that was in the year 1976 (3070 US $ million). The variable GCF has shown consistent growth from 23347 US $ million in the year 1976 to 543678 US $ million in the year 2013. The variable Exports has also grown 80 times with the passage of time in the study. The variable Employment has shown 5 times increase during the period of study.
Section III
Data Base and Research Methodology
It has been observed from review of the literature that some studies have evaluated positive (Guha and Ray, 2000; Rangarajan, 2000; Hansen et al., 2003; Yao, 2006;Tiwari,2011 etc.) while some others have found negative or no impact of FDI on growth (Lo, 2007; Mathiyazhagan, 2005;Falki,2009;Das and Das,2012). There arises a doubt on this relationship on account of lack of general consensus among the researcher about the nature of this impact. Therefore, GDP as a parameter of growth has been taken in the present study to verify the exact nature of impact. Very few studies have investigated the impact of FDI on Foreign Exchange Reserves (RES). Moreover, FDI is supposed to resolve foreign exchange reserves constraints by its contribution to increased exports apart from bringing in net resource inflows on the capital account of the country. So, there is need to estimate the exact impact of FDI on RES.
Gross Capital Formation (GCF) has been selected as a parameter for studying the impact of FDI because it has always remained a debatable issue that whether FDI has favourable or adverse impact on domestic capital . Herrero and Simon, (2003) found out week impact of FDI on exports in developing country while Mathiyazhagan, (2005) and Sharma, (2003) found insignificant impact on exports of India. So, this implies a thorough investigation on account of disagreement regarding the impact of FDI on this major reflector of growth.
Generation of Employment (EMP) has become the foremost agenda of India and a very important indicator of growth in the economy which advocates the logic for including this variable in the present study. Moreover genuine and extensive research work regarding this parameter in India is seriously lacking.Mehra,2013 found no relationship between Employment and FDI. All the facts and logics given above lay down the strong foundation for selecting Gross Domestic Product (GDP), Gross Capital Formation (GCF), Exports (EXP), Employment (EMP) and Foreign Exchange Reserves (RES) as macroeconomic parameters to study the impact of FDI inflows in India. In this chapter an attempt has been made to assess the impact of FDI on the selected macro economic variables (mentioned above) in India.
Variables, Data Source and Period of the Study The data has been taken from year 1976 to 2013 for India. The data has been drawn from the World Development Indicators and World Development Reports published by the World Bank. The variables used in the study are Foreign Direct Investment (FDI), Gross Domestic Product (GDP), Gross Capital Formation (GCF), Export (EXP), Employment (EMP), and Foreign Exchange Reserves (RES). In order to neutralise the impact of change in prices, all the variables except Employment has been deflated at 1993-94 prices by using Purchasing Power Parity Index (PPI).
Description of Variables: Variables Description LNEMP Natural Log of Employment LNEXP Natural Log of Exports LNFDI Natural Log of Foreign Direct Investment LNGCF Natural Log of Gross Capital Formation Inflation LNGDP Natural Log of Gross domestic product LNRES Natural Log of Reserves
Statistical Diagnostic
Initially, the study used the regression analysis for finding the dependence of GDP on FDI then the dependence of other variables like RES, GCF, EXP and EMP on FDI has been determined individually. Stationarity of all the variables have been tested by applying ADF test then simple regression technique has been used. The results of the analysis have been depicted in Table no. 3. Value of coefficient indicates the change in dependent variable due to unit change in independent variable. Value of adjusted R2 shows the percentage explained variation in dependent variable caused by the independent variable. X coefficients as shown in Table no. 3 show positive impact of FDI on all the variables of the study. It means that any increase in FDI will lead to increase in the dependent variables.
Table 3: Regression Results (FDI as Independent Variable) India
Variable Coefficients Standard t-Statistics Prob. Adjuste F-statistic Durbin Error d R2 Watson
EMP 0.084 0.008 10.43 0.000 0.76 108.95* 0.39 EXP 0.475 0.026 17.64 0.000 0.91 311.40* 0.94 GCF 0.342 0.024 13.77 0.000 0.84 189.66* 0.71 GDP 0.315 0.021 14.91 0.000 0.88 222.55* 0.74 RES 0.579 0.040 14.23 0.000 0.86 202.66* 0.80 ** denotes significance at the level 1%.
All the variables have significant F value showing the significance of the model. The value of adjusted R2 ranges between 0.76% to 0.91%. The analysis further reveals that the value of Durbin-Watson statistics is very low signifying the existence of autocorrelation. To overcome this problem, cointegration test has been applied to examine the impact of FDI on macro economic parameters selected in the study which is free from all these types of errors.
Econometric Methodology The technique of cointegration has been used to assess the impact of FDI on various macroeconomic parameters taken for this objective. The first step of the estimation process is to examine the time series properties of the data series i.e. presence of drift and trend in the data and test for stationarity and the order of integration. In fact most economic variables are non-stationary (integrated) in their level form. These non stationary time series may result to spurious regressions. Although a simple least squares regression of integrated variables may be spurious, one or more linear combinations of the series may exist that result in a stationary residual. There is need to check for the stationary of each series before applying aforesaid technique. All the six variables namely LNGDP, LNEMP, LNEXP, LNGCF, LNFDI, and LNRES have been tested for stationarity by applying the Augmented Dickey-Fuller test (ADF) before estimating any relationships between FDI and various macroeconomic parameters.
Section IV
Results and Discussion
The analysis of these variables in this paper indicates the dependence of growth of gross domestic product and other macro economic constituents of the economy on FDI based on empirical investigation of five variables. The ADF test results for the six variables involved in the analysis have been presented in Table 4. It has been observed that the null hypothesis of presence of Unit Root has been rejected for all the first difference variables specified. This shows that all variables are integrated of order one and hence, observed stationary at first difference. This suggests that Cointegration analysis can be applied to examine existence of long run relationship among the variables under study.
Table 4: Augmented Dickey Fuller Test Results Unit Root Tests at Logarithmic levels
Sr. No. Variables Without Drift and With Drift With Drift and Time Trend Time Trend 1 LNEMP 3.0501 -2.4281 -2.3502 2 LNEXP 7.4094 2.1300 -0.1733 3 LNFDI 1.5934 -0.0166 -3.3197 4 LNGCF 4.5696 1. 0722 -0.1724 5 LNGDP 6.3129 0.7298 -0.8886 6 LNRES 3.2625 0.8558 -1.0069 Unit Root Tests at First Differences Sr. No. Variables Without Drift and With Drift With Drift and Time Trend Time Trend 1 LNEMP -4.1257** -5.5312** -5.8421** 2 LNEXP -0.0597 -4.9221** -5.3423** 3 LNFDI -5.1682** -5.6096** -5.6041** 4 LNGCF 0.0415 -6.8679** -6.9650** 5 LNGDP -0.1178 -5.0501** -5.1616** 6 LNRES -4.0188** -4.6184** -5.0865**
** denotes significance at the level 1%. Critical values obtained from Mackinnon (1991) are -2.85, -3.41, and -1.94 at 5% level and -3.43, -3.96, and -2.56 at 1% for first second and third model respectively.
Further implication is that there is a possibility to have a co-integrating vector whose coefficient can directly be interpreted as long-term impact coefficients. Therefore, as next step, Johansen Trace test has to be used to check whether we have a cointegration test where each form differs in the assumed deterministic component(s) in the series: After selecting the order of integrating, next step is to test the cointegration rank. Here, a Vector Autoregressive Regression (VAR) system is to be formed. This step involves testing for the appropriate lag length of the system. In this model lag length has been taken as one for VAR and Zero for cointegration window due to small sample size and less number of observations. Third model for cointegrating window has been selected which is the most realistic one i.e intercept in Cointegrating equation and VAR.
The impact of FDI on these macroeconomic variables has been determined by taking five cointegrating relationships i.e GDP with FDI, GCF with FDI, RES with FDI, EXP with FDI and EMP with FDI. This cointegrating relationship represents the foundation of a complete Dynamic Error Correction Model. Vector error correction model (VECM) of the endogenous variables has been specified which provides a generalization of the partial adjustment model and permits the estimation of short-run and long-run elasticities. This long-run association shows the elasticities of GDP, GCF, RES, EXP and EXP with respect to FDI. Here X coefficient (elasticities) shows the percentage change in macro economic parameters due to one % change in FDI. Results are presented in Table 5.
Table 5: Estimated Cointegrating Relationship
Equations Variables Constant Impact of FDI 1 LNGDP 11.424 0.284** (8.45) 2 LNGCF 8.975 0.301** (7.82) 3 LNEXP 6.943 0.446** (10.43) 4 LNEMP 11.654 0.065** (4.56) 5 LNRES 6.124 0.634** (9.32) ** denotes significance at the level 1%. Figures in Parentheses are t values.
The results of the analysis given in this Table can also be depicted in the form of the following regression equations to have more lucid explanation. Equation no. 1 to 5 indicates the impact of independent variable FDI on various macro economic parameters taken in the study for India.
GDP = 11.424+ 0.284 FDI +u1i …………………………(1) (8.45)
GCF = 8.975 + 0.301 FDI + u2i …………………………(2) (7.82)
EXP = 6.943+ 0.446 FDI + u3i …………………………(3) (10.43)
EMP = 11.654+ 0.065 FDI + u4i …………………………(4) (4.56)
RES = 6.124+ 0.634 FDI + u5i …………………………(5) (9.32)
In India, X coefficient is 0.284 in case of GDP which shows positive and significant impact of FDI on GDP. It means one % increase in FDI results in 0.284 percentage increase in GDP. This is due the reason that FDI enhances economic growth by promoting technological developments and increasing level of production, income and export potential of a country. X coefficients of 0.301 has been calculated in India as far as the gross capital formation (GCF) is concerned showing 1% increase in FDI would cause the gross capital formation to rise by 0.301%. This also indicates the positive impact of FDI on GCF. Since FDI establishes backward and forward linkages with local industries, it can also encourage domestic investment by creating investment environment and by transferring technologies. However, the relationship between FDI and domestic investment depends on government policies, the quality of FDI and domestic regulatory environment (Alfaro, 2003). Exports is also found to be statistically significant variable affected by FDI as the coefficient of this variable are determined as 0.446 and which shows the 0.446 % variation in this variable is due to 1% change in FDI in India. FDI is also expected to have strong positive relation with the exports volume. This is because of the reason that the country with an importer of foreign technology can be postulated to have better export performance (Chopra, 2003).
FDI is found to be significant factor that causes the 0.065 % variations in employment as the value of X coefficients depict the positive impact of FDI on this variable. FDI helps to start new industries and also to expand existing industrial capacity, which in turn tends to increase output and thus employment in a country.
The coefficient of Reserves is estimated to be 0.634 indicating that a 1% increase in FDI would cause the Reserves to rise by 0.634 %. It has been found out that Reserves are positively related to FDI.
Table 6 Error Correction Term of VECM (India)
Variables Error Correction Term LNGDP 1.053** (3.18) LNRES 0.362** (3.19) LNEMP 0.289* (2.16) * denotes significance at the level 5%. ** denotes significance at the level 1%. Figures in Parentheses are t values.
The results in Table 6 provide short run dynamics pertaining to the adjustment of disequilibrium in the short period for India. In this Table error correction term represent the speed of adjustment and serves as a measure of disequilibrium representing the stochastic shocks in the dependent variable. This shows the proportion by which the long run disequilibrium in the dependent variable is corrected in each short period. It has been observed that any disequilibrium in the growth of GDP and RES would be corrected in the 0.94 years (1/1.053 =0.94), and 2.76 years (1/0.362= 2.76) respectively in India while EMP will converge toward equilibrium in 3.46 years (1/0.289= 3.46). Coefficients for all other variables are found to be statistically insignificant. The results of our analysis corroborates with earlier studies in which impact of FDI on various macro economic parameters in different regions of the countries has been analysed. Tu, (1990) found that FDI stimulated GDP, private fixed investments and exports in Taiwan. Kueh, (1992) observed that FDI contributed positively to capital formation, industrial output and exports of the open coastal regions of China. Athukorala and Sen, (1995) found that FDI has positive impact on GDP, Exports and Employment generation in case of Malaysia in the past two decades. Feridum, (2006) concluded that the economic growth as measured by GDP in Singapore was significantly caused by the FDI. Lan, (2006) found the positive and statistically significant impact of FDI on economic growth, exports, domestic investment, employment, human capital, and technology transfer in Vietnam. Mottaleb, (2007) estimated very important role of foreign direct investment (FDI) in achieving rapid economic growth and capital formation in the developing countries by bridging the gap between domestic savings and investment. Paolino, (2009) observed the positive impact of foreign direct investment on GDP, domestic investment, and human development in China by using ordinary least squared technique for time series data. Ma, (2009) found significant and positive effect of FDI on GDP in India. Tiwari (2011) also found positive relationship between FDI and GFCF.
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